Summary of Core Accounting and Tax Principles

## Introduction Accounting for VAT, depreciation and taxation connects transactions, asset use and government obligations. This guide explains how Value-Added Tax (VAT), depreciation and corporate income tax interact in practical accounting, with clear rules, examples and journal-entry level guidance for a non-attending student. > **Definition:** Value-Added Tax (VAT) is a consumption tax charged on the supply of goods and services, recoverable by VAT-registered businesses on purchases. Depreciation is the systematic allocation of an asset's cost over its useful life. Corporate tax is a tax on taxable profit charged to companies. ## 1. VAT: basic rules and accounting treatment ### How VAT works - VAT is charged on sales (output VAT) and paid on purchases (input VAT). - A VAT-registered business charges output VAT to customers and claims input VAT back from the tax authority (SARS in South Africa) on VATable purchases. - Only the net VAT (output minus input) is paid to SARS or reclaimed. > **Definition:** Output VAT is VAT charged to customers. Input VAT is VAT paid on purchases that is claimable by a VAT-registered business. ### Practical VAT accounting (journal-level) - When buying an asset (VATable) for R1,000,000 plus VAT at 15%: - Purchase price excluding VAT: R1,000,000 - VAT paid: R150,000 - Journal (when VAT is claimable): debit Asset R1,000,000; debit Input VAT R150,000; credit Cash/Payable R1,150,000. - When selling products for R500,000 plus VAT at 15%: - Sales excluding VAT: R500,000 - Output VAT charged: R75,000 - Journal: debit Receivable/Cash R575,000; credit Sales R500,000; credit Output VAT R75,000. - Net VAT payable to SARS: Output VAT $-$ Input VAT. Example calculations: - Purchase tractor: cost R1,000,000 + VAT R150,000. If VAT-registered, input VAT R150,000 is claimable, so the actual tractor cost on the books is R1,000,000 (not R1,150,000). - Sale: sell maize R500,000 + VAT R75,000. Net VAT due this period = $75,000 - 150,000 = -75,000$ (a refund of R75,000, if no other VAT balances). > **Definition:** Net VAT payable = Output VAT $-$ Input VAT. Fun fact: VAT is a multi-stage tax collected at each production stage, but businesses only remit the value they add, which avoids cascading taxes. ### When VAT is not claimable - If a business is not VAT-registered, it cannot claim input VAT and the VAT paid becomes part of the asset or expense cost. - If an asset or purchase is VAT-exempt or non-VATable, input VAT cannot be claimed. ## 2. Depreciation: purpose and methods ### Why depreciate - Depreciation spreads the cost of a tangible asset over its useful life to match expense with revenue. - It reduces carrying value of the asset on the balance sheet and creates a depreciation expense on the income statement. > **Definition:** Depreciation expense is the portion of an asset's cost allocated to an accounting period. ### Common methods (short overview) - Straight-line: allocate equal amount each year. - Diminishing-balance (reducing balance): higher expense early, lower later. - Units-of-production: expense based on actual usage. ### Should VAT be included in depreciation? - No, do not include VAT in the depreciable base if the VAT was claimable. The depreciable amount is the asset cost excluding claimable VAT. - If VAT is not claimable, include the VAT in the asset cost and depreciate the full amount. Example: Tractor purchased R1,000,000 + VAT R150,000. If VAT-registered and VAT is claimable, depreciable base = R1,000,000. If not claimable, depreciable base = R1,150,000. Fun fact: Choosing a depreciation method does not change total economic cash flows, only timing of expense recognition and reported profit. ## 3. Taxation: taxable income and interactions with depreciation ### Corporate tax basics (South Africa example) - Corporate tax rate example used here: 37% (as provided). Taxable profit is the profit per tax rules, which may differ from accounting profit. > **Definition:** T