The picture above explains how the flow of money works in when a business is in trading.
What about VAT?
VAT is actually not part of a business. It is tax that we collect on behalf of the government. We just have to keep it in a separate box until they collect it.
The story goes like this: On each sale that we make - we must charge the client 15% tax and keep it in a box called "tax collected". We owe this money to the government.
On the other hand, if we buy things, and are being taxed - we have to recover this tax from the government. We keep this in a "tax paid" box.
At the end of the day we compare the "tax collected" box with the "tax paid" box and just settle the balance.
It never enters our income or expense system. It only uses our asset liability system - with the effect that it always balances out to zero. This is because all assets (tax collected) is equal to the liability (tax owned).
Money Pipes
The flow of money in an accounting system can be compared to a pipe network. Below is an example of a money flow pipe network for a typical small business.
This was Concept 4.
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MoneyFlows by Benico van der Westhuizen is licensed under a
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