Why revenue excludes VAT collected
Why a client's revenue is recognised net of VAT or sales tax while its receivables include it, where the tax belongs, and how to spot it in revenue.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A client's revenue in the draft statements is noticeably higher than the turnover declared on its VAT returns. The owner is delighted. The partner is not. Somewhere in the ledger, VAT collected from customers has been counted as the client's own income.
It is a simple error with awkward consequences: overstated revenue and profit, an understated liability to the tax authority, and margins that do not match reality. It is also easy to prevent once everyone involved understands why VAT sits outside revenue in the first place, and where in the books it should go instead.
Tax collected for someone else is not revenue
ACCA's article on trade receivables and revenue explains that, under IFRS 15, sales tax collected on behalf of third parties is not part of the transaction price. Revenue is therefore recognised net of sales tax, even though the receivable from the customer includes it.
The reasoning is straightforward. A VAT-registered client in South Africa, Nigeria or Kenya collects VAT from its customers as an agent of the tax authority, whether that is SARS, the NRS or KRA. The client never had any right to keep it. Counting it as revenue would be like a cashier counting the float as the day's takings.
Receivables and payables carry the gross amount
The customer owes the full invoice, tax included, so the receivable is gross. ACCA's article sets out the basic recording of a credit sale: debit trade receivables, credit revenue in the general ledger, with the customer's individual account kept in a subsidiary ledger that is not part of the general ledger. For a VAT-registered seller, the credit side is split: revenue for the price excluding tax, and the output VAT account for the tax.
The same logic runs the other way for purchases. ACCA explains in its article on supplier statement reconciliations that amounts due to a supplier include sales tax, because the customer pays the gross amount and the supplier is responsible for paying the tax to the tax authorities. So the client's payables are gross, and the input VAT it can recover sits in its own account.
In a worked example in words: a VAT-registered client sells goods on credit. The invoice shows the price, the VAT and the total. The customer's account in the receivables ledger shows the total. Revenue shows the price. The output VAT account shows the VAT, which forms part of the client's next VAT return and is paid over to the authority.
Where clients go wrong
Errors cluster around a few habits:
- Cash sales posted gross. Till takings or cash deposits posted straight to sales, with no VAT split.
- Deposits and advance payments. VAT due when the payment is received is missed because no invoice was raised.
- Credit notes. Refunds posted against revenue gross, or against output VAT only.
- Mixed supplies. Standard-rated, zero-rated and exempt sales posted to one revenue account with a single VAT calculation applied to all of it.
- Recently registered clients. Revenue includes VAT for the months after registration because invoicing habits did not change.
- VAT adjustments posted to revenue. Corrections agreed with the tax authority, or output VAT on a disposal, posted to sales.
A useful first test is to compare revenue in the trial balance with taxable supplies declared on the year's VAT returns. Differences have explanations, such as timing, exempt income and non-supply receipts, but every difference should be explained.
Spotting VAT in revenue at upload and mapping
A firm can upload a client's general ledger in the layout its accounting package exports, as CSV, .xlsx or .xls. Achekam adds it up into a trial balance and checks every printed account total against its own sum. Differences are named and never quietly fixed. That is the moment to look at the revenue and VAT control accounts together: their relationship should make sense for the client's mix of supplies.
Mapping comes next. Achekam suggests where each trial balance line belongs, from the file's own mapping column, earlier mappings, AI or keyword rules. Without an AI key, keyword rules are used and labelled. No suggestion becomes an approved mapping until a person approves it. Two things to watch:
- The output VAT account should map to liabilities, not to revenue or other income, whatever its name in the client's chart.
- Any account called something like "sales including VAT" or "cash sales" needs a closer look before it is approved as revenue.
Correcting the split before the statements are built
Where revenue includes VAT, the correction moves the tax out of revenue and into the VAT liability, or into a receivable from or payable to the authority depending on the client's VAT position. In Achekam's Studio, staff can post that as a year-end adjusting entry. If the entry turns out wrong, it is reversed with a record of who did it and why, never deleted.
The correction usually raises a second question: if VAT was missed in revenue, was it also missed on the VAT return? If so, the client may owe tax. That is a matter for the client and the tax authority, with the firm's advice, and it should be raised promptly, not left for the statements to reveal.
A short review routine
- Reconcile revenue in the trial balance to taxable supplies on the VAT returns for the year.
- Check the output VAT account maps to liabilities.
- Look for revenue accounts fed by cash sales or deposits.
- Confirm credit notes reduce revenue and output VAT in the right proportions.
- For non-registered clients, confirm no VAT was charged; if it was, find out why.
How mapping suggestions are reviewed and approved is covered in trial balance mapping suggestions and approvals, and the five steps of IFRS 15 sets transaction price in its wider context. On the next file, put the revenue-to-VAT-return reconciliation at the start of the review rather than the end.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
