VAT and Trade Discounts Quiz

Muhammad, Ava, and Arthur run a small business. They recently made a sale and received a gross amount. How do they extract VAT at a rate of 20% from this gross amount?

• Multiply the gross amount by 0.2

• Divide the gross amount by 5
• Add 20% to the gross amount

• Divide the gross amount by 6

Answer explanation

To extract VAT from a gross amount (when VAT is 20%) just divide the gross amount by 6

WATCH out for the words:

Inclusive, includes VAT

Excludes VAT

Net amount add on 20% VAT

£100 x 20% = £120

Net amount is £100

VAT amount is £20

Gross amount is £120

Scarlett runs a small business and she received an invoice for a bulk purchase. Lily, her accountant, advised her to deduct something before calculating VAT on the invoice. What should Scarlett deduct?

• Trade/bulk discount

• Shipping costs

• Product warranty

• Customer loyalty points

Answer explanation

Dealing with a trade/bulk discount Always deduct trade/bulk discount before calculating VAT

A trade and/or bulk discount must first be deducted on an invoice (and credit note) before calculating VAT on the net amount.

Grace, Ishaan, and Arthur run a bookstore. Who among their customers is typically given a trade discount?

• New customers

• Established customers

• Quantity customers

• Retail customers

Arjun runs a bookstore. He decided to give something to customers who buy books over a specific quantity or value. What is this called?

• Trade discount

• Bulk discount

• Promotional gift

• Free shipping

Answer explanation

Difference between trade and bulk discount Established customer vs Quantity customer

A trade discount will be given to established customers whilst a bulk discount will be given to customers who buy over a specific quantity or value

Benjamin has recently started a business and is learning about finances. He is confused about the difference between capital and revenue expenditure. Can you help him understand?

• Capital expenditure is the money Benjamin would use for purchasing non-current assets or making improvements in his business, while revenue expenditure is the money he would use for daily running costs like salaries, rent, etc.

• Capital expenditure is the money Benjamin would use for purchasing non-current assets or making improvements in his business, while revenue expenditure is the money he would use for daily running costs like salaries, rent, etc.

• Revenue expenditure is the money Benjamin would use for purchasing property for his business, while capital expenditure is the money he would use for paying employee salaries.

• Capital expenditure is the money Benjamin would use for marketing costs, while revenue expenditure is the money he would use for purchasing equipment for his business.

Anaya, Isabelle, and Ava started a small business together. They invested in some assets, took on some liabilities, and contributed their own capital. Can you identify the three elements of the accounting equation they are dealing with?

• Assets, Expenses, Capital

• Assets, Liabilities, Revenue

• Assets, Liabilities, Capital

• Assets, Capital, Drawings

Answer explanation

The Accounting equation Assets – Liabilities = Capital or Assets = Capital + Liabilities

Providing two of the three items of the equation are known then the missing item can be calculated using the above equation

Scarlett is the treasurer for a local community charity. She is responsible for managing the council's petty cash. She uses an imprest system. What does this mean in this context?

• It means that Scarlett restores a specific amount of cash at the end of a period so the petty cash tin contains the same amount as the previous period.

• It means that Scarlett provides cash on an as-needed basis without a fixed starting amount.

• It means that Scarlett never replenishes the cash and must carefully budget it.

• It means that Scarlett provides cash in advance for future expenses.

Ava, Florence, and Mia are learning about ledger accounts in their accounting class. Their teacher asks, 'When you are balancing a ledger account, what should the balance c/d and balance b/d represent?'

• Balance c/d is the closing balance, and balance b/d is the opening balance.

• Balance c/d is the total debits, and balance b/d is the total credits.

• Balance c/d is the total credits, and balance b/d is the total debits.

• Balance c/d and balance b/d should both represent the total balance.

Answer explanation

When balancing a ledger account, ensure that both sides total the same by entering the balance c/d on the side which would have the lower total. The balance c/d goes above the totals, the balance b/d will go on the other side of the T account, below the totals

Harry runs a small business and he is learning about bookkeeping. He came across the term "double entry" when posting from the sales day book. What does it mean?

• It means when posting from the sales day book the double entry is Dr Sales Ledger Control, Cr Sales & Cr VAT (remember the Net and VAT stay on the same side)

• It means recording the transaction as both a debit and a credit in the same ledger.

• It means recording the transaction in the sales ledger and the VAT account. Dr Sales Ledger Control, Cr VAT

• It means recording the transaction twice in the sales ledger for verification.

Answer explanation

When posting from the sales day book remember that NET and VAT stay together when posted to the ledgers. Therefore the double entry is:

Dr Sales ledger control Cr Sales } Stay together

When posting from the purchase day book - What is the double entry?

• Double entry is:

  Dr Purchases

  Dr VAT

  Cr Purchase ledger control

  Cr Purchase ledger

• Double entry is:

  Dr Purchase ledger control

  Cr Purchases

  Cr VAT

• Double entry is:

  Dr Purchases

  Dr VAT

  Cr Purchase leger control account

• Double entry is:

  Cr Purchase ledger

  Dr VAT

Answer explanation

When posting from the purchases day book remember that NET and VAT stay together when posted to the ledgers. Therefore the double entry is: Dr Purchases } Stay together Dr VAT Cr Purchases ledger control.