Output VAT Does Not Reconcile with Revenue – Help

This post is written primarily for Kenya and related jurisdictions where firms operate on an Accruals environment and where VAT law states that Output VAT is a function of taxable income.

After month end when firms have to file their VAT returns they have to ensure that the VAT is computed correctly and it reconciles with the taxable revenue. The simple formula is: Sales per Income Statement X VAT % = Net Output. This net Output should agree with the VAT Journal  (VAT Collectible after ITC Adjustments in PCLaw's VAT Journal).

There are a myriad of possibilities why the output VAT will not agree/reconcile after factoring any round offs. The hunting of the difference will begin after identifying what the difference is whether it is over or under stated.

VAT is a component of Fees and Disbursements Recoveries billed. One would use the elimination method to narrow down the areas that need to be looked at but some of the areas to look at:

·         G/L Statements: Run the G/L statement (non-detailed report) for first income to last income and focus on the Fees and Exps recovery G/L Accounts and see if there are any mispostings. In Fee accounts the source journal should only be BJ and WUD. For Expense Recovery G/L accounts the source should be CER and WUD. If you have entries originating from GB, PJ or GJ then these need to be looked at.

·         Write Up/Down (WUD) Journal: If there are WUD entries on the Fees and Exps recovery income G/L Accounts, run the WUD Journal and ensure that the invoices on which the Write Ups/Downs were done relate to Credit Notes and VAT accounts have been affected accordingly.

·         Invoice Journal Report: Run this report with correct layouts for Fees VAT. Throw the report to Excel and work on the Fee column. If there are any invoices billed which have no VAT charged ascertain that those were the Zero Rated Sales invoices. Then create a column for Fees VAT and compute the Fees manually using formula: Cell with Fees X VAT Rate. Then create another column for the Diff between VAT computed on the PClaw report and VAT computed manually on Excel. The difference should be zero. If there are material differences then that means that the VAT amount on Fees was altered at billing time.

·         Client Cost Journal: Run this report for the period in question filtered to include Expense Recovery entries only. On the resultant report check under the G/L Account Summary that the G/L allocations are to the correct (income) accounts.

·         Register>Expense tab:  Filter this for Unbilled  entries. This will produce all anticipated (ANT) Disbs and any Expense Recovery entries that have been unbilled. For this to work the Register should be run on the last day of the VAT month or before the billings for the following month has commenced.

·         Client Ledger Report: Run the client ledger for Disbursements only with a start and end date of the month in question. This report can be run at any time after the end month. The report must be run with the following filters under Advance Search which I have discovered to be very useful:

o   Received From/Paid To is Equal To “Expense Recovery” And Invoice Number is Greater Than XXXX where (XXXX equals the first invoice number of the following month’s billing) (This will work if all invoice numbers are sequentially used for the firm’s billing). The resultant report will show up any Expense Recovery entries that were made in error in the VAT month in question (incorrect date) but billed in subsequent months. This is useful if you are doing the exercise past the VAT period and the billings for the subsequent period has commenced.

o   Received From/Paid To is Equal To “Expense Recovery” Or Received From/Paid To Has “Taxes on Disbursements”. The resultant report will give a list of all ledgers that have Expense Recovery and Taxes on Disbursements. The report can be exported to Excel and analyzed by sorting out. On Excel a) ANT Disbursement entries can be alienated, b) Zero VAT Rated Expense Recovery entries can be identified and alienated and c) any Vatable Expense Recovery entries that have no corresponding Taxes billed identified and alienated. The balance of entries can be checked for VAT calculation to ensure that the total VAT billed on Disbursements is correct.

From my experience a lot of the VAT differences arise from the Disbursement elements.  Unfortunately there is no way users can be able to tell the Vatable Disbursements from the Non-Vatable Disbursements billed using built in reports in PCLaw . One therefore has to rely on mining the information from the above reports. The above if looked at properly should enable one to identify the errant entries or incorrect VAT amounts.

As a rule I recomend Accounts staff at all offices to reconcile the VAT on the last day of the month by close of business.

About Accurate Billing and Collection Reports

Billing and Collection information plays a vital part in law firms' remuneration structure. This information is constantly needed to make objective/subjective assessments of lawyers or partners productivity.

There are numerous reports in PCLaw to get this information. However for information to be consistent and accurate the system must be configured and data entry rules set to properly reflect the company’s policies on fee credits and collections.

There are a number of areas in PCLaw that need to be configured properly.

To begin under System Settings>Billing tab the option “Allocate fee changes to Resp Lawyer” determines if any Bill Up/Down of Fee amounts during billing should be allocated to the responsible lawyer or not. This is important and most firms leave it disabled if they wish the changes to be pro-rated amongst the working lawyers.

The next important area is under System Systems>Data Entry tab. Here you define how the collections are applied. Most firms leave it to Taxes, Disbursements and Fees in that order. It is important that this setting reflects the company’s policies and once set this setting is not changed. However this can be overridden on a case by case basis. For instance if the client is only paying the Disbursements and Taxes portion of the bill and not the fees, this can be allocated at data entry under Receive Payment>invoices tab>Payment details button.

The other area to look carefully at is at Matter levels Bill Settings. Here under Options “Auto Allocate Time/Fees to Working Lawyers” is checked by default and that is what most firms wish to allow PCLaw to automatically determine and allocate the fee credits to the lawyers working on the case at billing time in proportion to the value of their time spent. If it is the company policy for all fee credits to go the file holder then this option must be left unchecked (fee credits in such a case will go the Responsible Lawyer).

Within these parameters PCLaw still allows you to override who gets the fee credits at billing stage. If fee credit overrides is to be done, this can be accomplished at the “Prompt for changes to Billed Amount” stage during billing or at Matter Manger>Billing tab under “Split Lawyer Charges”. Firms must set clear rules embedded at Prebill levels for partners in charge of the matter to indicate desired fee credit allocations on Prebills.

Properly setting up the system and defining rules for partners, billing/accounts staff to follow for fee credits and collections is therefore vital to get accurate and consistent billings and collections reports.

Journal Entry on Bank Journal Issue

The G/L Adjustment feature in PCLaw can be used to pass non-matter related entries (receipts/payments) via the General Bank journal. After performing the entry “Show Entry on Bank Journal” must be checked. The entry will appear on the General Bank Journal with a blank “Received From/Paid to” field while the "Rec/Chq #" will indicate the Journal Adjustment Ref #.

Tip: Faster way perhaps for accountants to record transactions for several office banks (e.g. monthly bank charges) in one go.

Bug: Once the entry is done NEVER drill down from the General Bank Journal or General Journal reports to delete the entry because although it will appear as deleted on the General Journal report,  the bank journal and G/L statements will still show the entry.  To get round this one would have to pass a reversal entry or call Technical Support to help fix the issue by removing the entry from the back-end. The only uneventful way to delete the entry would be via G/L>General Journal>Correct G/L Adjustment. This issue is true as of V10 SP5 HF3.