Question

Jordan purchased goods on credit from Alex at a cost of £2,400 including VAT at the standard rate of 20%. Both Jordan and Alex are required to account for VAT.

What double-entry should Jordan use to record the purchase of goods from Alex?

Answer 1

Jordan's double-entry to record the purchase of goods from Alex for £2,400 including VAT will be a debit to 'Purchases' for £2,000, a debit to 'VAT Input' for £400, and a credit to 'Trade Creditors' for £2,400.

Step-by-step explanation:

Jordan made a purchase on credit from Alex for goods costing £2,400, which includes the standard VAT rate of 20%. As both Jordan and Alex are registered for VAT, they need to account for VAT separately in their books. The double-entry for recording the purchase in Jordan's accounting ledger would therefore involve two main steps. The first step is recognizing the cost of the goods excluding VAT, and the second is recording the VAT component separately. The accounting entries would be:

• Debit 'Purchases' account with £2,000 (cost excluding VAT)
• Debit 'VAT Input' account with £400 (VAT amount)
• Credit 'Trade Creditors' account with £2,400 (total cost including VAT)

These entries reflect the increase in Jordan's inventory or expense for goods received and acknowledge the credit owed to Alex. At the same time, they capture the VAT Jordan can reclaim on their VAT return.