Calculations on VAT invoices - various options for converting numerical values
Last updated: 2021-06-11
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Methods of conversion of amounts on invoices used by software designed for this purpose vary.
This creates a lot of controversy between the parties to the transaction (the counterparties who issue sales invoices, and contractors who enter these invoices as costs) when the conversion methods in the parties’ software are not compatible.
Methods of conversion of amounts on invoices depend on what “type” of counterparty issues that invoice and what amounts on invoices matter most to them.
Invoices can have two different forms of calculations. They may be calculated from net amounts or from gross amounts. Let's look at each of these ways separately.
1) The invoice calculated from the net amount
An invoice calculated in this way is used on the business market in the company-to-company transactions. On the business market, net prices (excluding VAT) are much more often used than gross prices. Often the reason is that the majority of clients are VAT payers, who has the right to deduct VAT amounts. Although they count the VAT amount after paying the invoice, they are usually interested in net prices. Let's analyze the conversion scheme of such an invoice from the net amount, and potential inaccuracies that may become the cause of disputes.
The calculation scheme for this type looks as follows:
Unit net price x Quantity = Total net
having the net value for a particular item, you can calculate the VAT amount for a particular item and then the gross value:
Total net x VAT rate = VAT amount
Total net + VAT amount = Total gross
This will be clearly visible on the example.
As you can see on the invoice, the sum of the fields of individual values of net, VAT and gross amounts is consistent.
Such compliance on the recalculated invoice can be obtained by setting the program calculation methods in Settings> Account settings> Configuration> Ways of calculation:
In the second variant when setting the unit price on net format, setting the section How to calculate total invoice value shown above does doesn’t matter, because the basis in this configuration is the net calculation.
On the same basis (entering net amounts), changing the How to calculate values in invoice position to Keep gross (in accordance with cash register) also will not change anything in your counting scheme.
What happens if you do the calculation completely differently?
For example, instead of counting VAT from the entire invoice as a separate summary of the VAT amount from the column, you sum all Total net values x VAT rate = Total gross.
As a result of such a scheme, counting theoretically also from net amounts, you obtain a penny-difference in the VAT amount, and thus in the amount of the entire invoice.
Amount discrepancies related to rounding can be larger, depending on the large number and varied prices of products, and the larger number of VAT percentage rates on a given invoice. Less-oriented people may question the correctness of the calculation of a given invoice on this basis.
What to do in such a case? There is no reason to worry, both forms are correct and acceptable by the legislator.
What is the purpose of the VAT and the gross amount in individual positions on an invoice?
Why is there a table with a summary of different VAT rates in each VAT invoice, since there are more than one percent rate?
It depends on the way of working and accounting documents by the accountant. Some accountants do not record the entire invoice in the books, breaking down invoices into the necessary sections. In this case you need the individual rows or their sums.
Both the provider and the recipient of the invoice can use accounting services of an accountant, who will want to settle the same invoice in a different way.
2) Invoices calculated from gross amounts
Invoices with such a counting scheme are used on the retail market, in stores or markets - that is, where the initial price of goods is the gross price.
In general, when we buy products or services, we are not interested in VAT. We have to pay it, but if we are not VAT payers, we cannot deduct it.
Let's look at what the invoice already presented by us above looks like, but this time let’s calculate it from the gross amount.
On such an invoice, calculations are made identically as on a fiscal receipt.
The counting scheme in each row looks as follows:
Unit gross price x Quantity = Total gross
Let's check if this applies in the case of our 1 row:
42.00 USD gross x 12 pcs = 504.00 USD gross
The VAT value on such a document is calculated using the schema that looks as follows:
VAT amount = Total gross x (percentage VAT rate / one hundred + percentage VAT rate)
In the case of our 1 row, it will look like this:
504.00 x (20/120) = 84 USD
In the case of our system, the configuration of calculation methods for such an invoice will look as follows:
In theory, this is a sufficient variant, there is no need to maneuver the options in the section How to calculate total invoice value.
Sometimes there is a need for a cosmetic change on an invoice when you want not to have an additional penny resulting from rounding, because then the invoice looks “nicer” and instead of USD 25.01, you want USD 25.00 gross.
By maneuvering the field How to calculate values in invoice position and setting the default option, and then correcting the gross amount of the item, where there is an “unnecessary” penny, the program will allow you to save the invoice with the changes that are applied.
However, it will hide the removed penny in the net amount, or the VAT amount depending on the option chosen in the field How to calculate total invoice value.
The Unit net price and Total net columns on this invoice are purely informational. However, they are useful, for example, for comparison of wholesale prices, where net prices are used.
Our example shows a clear difference between the invoice calculated from net amounts and the invoice calculated from gross amounts. This is due to the difference in rounding.
With some numerical combinations there may be no differences, while with others (e. g. when there are larger numerical values and incomplete quantities) these differences can be significant and remove even a few dollars.
Calculations on gross invoices are incorrect, where unit net prices are used or the VAT amount is calculated as the sum of VAT amounts from invoice rows.
The invoice counted in this way contains the same data as the fiscal receipt.
Difficulties in calculations occur not only in the two cases described above. It often happens that you issue warehouse documents to cost or income invoices.
Therefore, the AG documents (documents of acceptance of goods) and RG documents (documents of release of goods) are traded. It happens that the RG document is also received by the accountant, who must include the stock in the accounts; or a client, who goes with such a document to the warehouse keeper to receive the goods.
Unit prices in the warehouse are stored in net values. The problem occurs when the RG with net prices is generated for an invoice calculated from the gross amount.
In this case, there will be differences on the warehouse document and the invoice. These will be differences caused by rounding. Entrepreneurs in this case have no choice but to inform their clients about it and not include prices on warehouse documents. Accountants, on the other hand, can use net prices on an invoice calculated from gross prices, which, as we stated above, are in some cases purely informational prices.