Applying VAT Adjustment for Prepayments

This section provides an overview of applying a VAT adjustment on a prepayment (an advanced payment or on-account payment). For French business transactions, the VAT amount of a sale should be included in the accounts receivable pre-paid account. For most VAT countries the VAT portion of the prepayment is not included in the pre-paid account.

To enable the VAT adjustment for advanced payments and on-account payments:

  • Enabled VAT for advance payments on the VAT Defaults Setup page (Set Up Financials/Supply Chain, Common Definitions, VAT and Intrastat, Value Added Tax, VAT Defaults) for the VAT Entity Registration driver.

  • For each business unit using VAT adjustment (for example, French business units), select the VAT Adjustment on Advance Pymt check box on the Receivables Definition- Accounting Options 2 page (Set Up Financials/Supply Chain, Business Unit Related, Receivables, Receivables Definitions, Accounting Options 2). This check box enables the system to include the VAT amount of a prepayment in the Accounts Receivable Pre-Paid account.

  • Enter an account for the new VAT accounting entry type, Output Advance with Adjustment, using the VAT Code- Accounting Information page (Set Up Financials/Supply Chain, Common Definitions, VAT and Intrastat, Value Added Tax, VAT Code, Value Added Tax Code, Accounting Information). This VAT adjustment account is used when recording an advanced payments within a business unit. To balance the prepayment transaction, a new accounting entry is made using this VAT adjustment account. When the prepayment is applied against an invoice or written off, the amount in the VAT adjustment account (and the accounts receivable pre-paid account) are reversed accordingly.

If the Receivables Update process generates VAT output entries for an advance payment, it performs the following tasks:

  • Records the final output VAT.

  • Reverses the VAT entries for the advance payment when you apply the advance payment to an item.

  • Reverses the VAT adjustment entries for the VAT portion of the advance payment when you apply the advance payment to an item.

If the advance payment is recorded in a foreign currency, the system does not revalue the VAT amount when you apply an item to the payment. When you enter the item, the system converts the remaining VAT amount to the base currency of the item's business unit using the exchange rate for the item.

The system also calculates the correct VAT amount and creates the correct accounting entries when you apply a discount to an advance payment. You must apply the discount when you apply the payment to the item.

This section provides the following examples, which demonstrate different VAT scenarios for creating accounting transactions for advance payments:

  • VAT adjustment for prepayment applied on a payment worksheet.

  • VAT adjustment on a maintenance worksheet with invoice declaration point set to delivery or invoice.

  • VAT adjustment on a maintenance worksheet with invoice declaration point set to payment.

Note:

The Payment Predictor process (ARPREDCT) processes VAT for prepayments and on-account payments in the same manner as the payment worksheet.

VAT Adjustment for Prepayment Applied on a Payment Worksheet

These are the expected accounting entries when using a payment worksheet to match an open invoice to a prepayment with a VAT adjustment. To make it simpler, the prepayment has the same amount as the invoice. In this example the declaration point can be any option (delivery, invoice, or payment).

The example has the following conditions:

  • For this business unit, the VAT Adjustment on Advance Pymt check box on the Receivables Definition- Accounting Options 2 page has been selected.

  • An account has been entered for the Output Advance with Adjustment VAT accounting entry type, using the VAT Code- Accounting Information page.

  • An advance payment of 1,196.00 EUR is received. Merchandise totaling 1,000.00 EUR has a standard VAT rate is 19.6 percent (1,000.00 x 19.6 percent = 196.00).

  • An invoice with the total 1,196.00 EUR, including 19.6 percent VAT, is sent to the customer.

  • The prepayment is cleared against the invoice on the payment worksheet.

  • The final payment of 1,196.00 EUR is received and applied on the payment worksheet.

Here are the accounting entries:

  1. When advance payment is created:

    Accounting Entry Debit Credit

    Cash

    1,196.00

     

    Advance Payments Received (AR)

     

    1,196.00

    Output Advance with Adjustment (VAT to Adjust)

    196.00

     

    VAT Output Final (VO)

     

    196.00

  2. When the invoice is sent to the customer:

    Accounting Entry Debit Credit

    Accounts Receivable (AR)

    1196.00

     

    User-defined (Revenue)

     

    1,000.00

    VAT Output Final (VO)

     

    196.00

  3. When advance payment is applied against the invoice on the payment worksheet:

    Accounting Entry Debit Credit

    Cash

     

    1,196.00

    Advance Payments Received (AR)

    1,196.00

     

    Output Advance with Adjustment (VAT to Adjust)

    196.00

    VAT Output Final (VO)

    196.00

     

  4. When final payment is applied against the invoice on the payment worksheet:

    Accounting Entry Debit Credit

    Cash

    1196.00

     

    Accounts Receivable (AR)

     

    1196.00

VAT Adjustment on a Maintenance Worksheet With Invoice Declaration Point Set to Delivery or Invoice

These are the expected accounting entries when using a maintenance worksheet to match an open invoice to a prepayment with a VAT adjustment. To make it simpler, the prepayment has the same amount as the invoice. In this example the prepayment can have any declaration point (delivery, invoice or payment) and the invoice has a declaration point of delivery or invoice (but not payment).

The example has the following conditions:

  • For this business unit, the VAT Adjustment on Advance Pymt check box on the Receivables Definition- Accounting Options 2 page has been selected.

  • An account has been entered for the Output Advance with Adjustment VAT accounting entry type, using the VAT Code- Accounting Information page.

  • An advance payment of 1,196.00 EUR is received. Merchandise totaling 1,000.00 EUR has a standard VAT rate is 19.6 percent (1,000.00 x 19.6 percent = 196.00).

  • An invoice with the total 1,196.00 EUR, including 19.6 percent VAT, is sent to the customer.

  • The prepayment is offset against the invoice on the maintenance worksheet.

  • The final payment of 1,196.00 EUR is received and applied on the maintenance worksheet.

Here are the accounting entries:

  1. When advance payment is created:

    Accounting Entry Debit Credit

    Cash

    1,196.00

     

    Advance Payments Received (AR)

     

    1,196.00

    Output Advance with Adjustment (VAT to Adjust)

    196.00

    		  

    VAT Output Final (VO)

     

    196.00

  2. When the invoice is sent to the customer:

    Accounting Entry Debit Credit

    Accounts Receivable (AR)

    1196.00

     

    User-defined (Revenue)

     

    1,000.00

    VAT Output Final (VO)

     

    196.00

  3. When the prepayment is offset against the invoice on the maintenance worksheet:

    Accounting Entry Debit Credit

    Advance Payments Received (AR)

    1,196.00

     

    Offset (control account)

    		  

    1,196.00

    Output Advance with Adjustment (VAT to Adjust)

    		  

    196.00

    VAT Output Final (VO)

    196.00

  4. When final payment is applied against the invoice on the maintenance worksheet:

    Accounting Entry Debit Credit

    Offset (control account)

    1196.00

     

    Accounts Receivable (AR)

     

    1196.00

VAT Adjustment on a Maintenance Worksheet With Invoice Declaration Point Set to Payment

These are the expected accounting entries when using a maintenance worksheet to match an open invoice to a prepayment with a VAT adjustment. To make it simpler, the prepayment has the same amount as the invoice. In this example the prepayment can have any declaration point (delivery, invoice or payment) and the invoice has a declaration point of payment (but not delivery or invoice).

The example has the following conditions:

  • For this business unit, the VAT Adjustment on Advance Pymt check box on the Receivables Definition- Accounting Options 2 page has been selected.

  • An account has been entered for the Output Advance with Adjustment VAT accounting entry type, using the VAT Code- Accounting Information page.

  • An advance payment of 1,196.00 EUR is received. Merchandise totaling 1,000.00 EUR has a standard VAT rate is 19.6 percent (1,000.00 x 19.6 percent = 196.00).

  • An invoice with the total 1,196.00 EUR, including 19.6 percent VAT, is sent to the customer.

  • The prepayment is offset against the invoice on the maintenance worksheet.

  • The final payment of 1,196.00 EUR is received and applied on the maintenance worksheet.

Here are the accounting entries:

  1. When advance payment is created:

    Accounting Entry Debit Credit

    Cash

    1,196.00

     

    Advance Payments Received (AR)

     

    1,196.00

    Output Advance with Adjustment (VAT to Adjust)

    196.00

    		  

    VAT Output Final (VO)

     

    196.00

  2. When the invoice is sent to the customer:

    Accounting Entry Debit Credit

    Accounts Receivable (AR)

    1196.00

     

    User-defined (Revenue)

     

    1,000.00

    VAT Output Intermediate (VOI)

     

    196.00

  3. When the prepayment is offset against the invoice on the maintenance worksheet:

    Accounting Entry Debit Credit

    Advance Payments Received (AR)

    1,196.00

     

    Offset (control account)

     

    1,196.00

    Output Advance with Adjustment (VAT to Adjust)

     

    196.00

    VAT Output Final (VO)

    196.00

  4. When final payment is applied against the invoice on the maintenance worksheet:

    Accounting Entry Debit Credit

    Offset (control account)

    1196.00

     

    Accounts Receivable (AR)

     

    1196.00

    VAT Output Intermediate (VOI)

    196.00

     

    VAT Output Final (VO)

     

    196.00