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.
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.
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