Ledgers and VAT returns explained for service businesses

A general ledger is the complete record of a business's financial transactions, sorted into accounts. A VAT return is a periodic report to the tax authority of the VAT you charged on sales minus the VAT you paid on purchases. Your invoices and supplier bills feed both.

If you run a service business, you probably send invoices every week and see your accountant a few times a year. This guide fills in the part in between: where those invoices go, and how they turn into the numbers on a VAT return.

What a general ledger is

The ledger is built from a chart of accounts: a numbered list of everything you track. The accounts fall into five groups.

• Assets: what the business owns or is owed, such as the bank account and money customers still owe you.
• Liabilities: what the business owes, such as unpaid supplier bills and VAT due to the tax authority.
• Equity: what belongs to the owners.
• Income: revenue from your services.
• Expenses: the costs of running the business.

Every transaction is recorded twice, as a debit on one or more accounts and a credit on others, with equal totals. That is double entry. Because both sides always balance, many errors show up as an imbalance, and the balances add up to a profit and loss statement and a balance sheet.

Receivables and payables: the two ledgers you touch most

Two sub-ledgers sit under the general ledger and roll up into it.

• Accounts receivable (AR): what each customer owes you, invoice by invoice.
• Accounts payable (AP): what you owe each supplier, bill by bill.

Your sales invoices drive receivables, and your supplier bills drive payables. If you track supplier bills next to customer invoices already, you have the raw material of both. Our guide to tracking supplier bills next to customer invoices covers the supplier side.

How an invoice posts into the ledger

On an accrual basis, where income counts when you invoice rather than when you are paid, the common events post like this:

Event	Debit	Credit
You send a sales invoice	Accounts receivable (total with VAT)	Revenue (net) and VAT payable (the VAT)
The customer pays	Bank	Accounts receivable
A supplier bill arrives	Expense (net) and input VAT (the VAT)	Accounts payable (total with VAT)
You pay the supplier	Accounts payable	Bank
You issue a credit note	Revenue and VAT payable	Accounts receivable

Reclaimable VAT never touches revenue or expenses. It sits in two accounts of its own, one for what you collected and one for what you paid, and those two accounts are exactly what a VAT return reports.

How a VAT return is built

1. Close the period. Make sure every sales invoice, credit note and supplier bill for the month or quarter is recorded.
2. Add up output VAT. The VAT on your sales invoices, minus the VAT on credit notes, split by rate.
3. Add up input VAT. The VAT on supplier bills you are allowed to reclaim. You usually need a valid supplier invoice to reclaim it.
4. Work out the difference. Output VAT minus input VAT is what you pay. If input is larger, you reclaim the difference.
5. Fill in and file the return by the deadline, then pay or wait for the refund.

Return periods are monthly, quarterly or yearly depending on the country and the size of the business. Some countries let smaller businesses account for VAT when cash is received or paid instead of when the invoice is issued, which changes which invoices fall into a period. Ask your accountant which applies to you.

What service businesses should watch

• Customers abroad. Inside the EU, a business-to-business service for a customer in another member state is usually invoiced without VAT under the reverse charge. The invoice says so and shows both VAT numbers, and the customer accounts for the VAT.
• Mixed rates. If you invoice at more than one rate, keep a per-rate breakdown on every invoice. The return asks for totals by rate.
• Corrections. Fix a wrong invoice with a credit note rather than editing it, and ask your accountant which period the correction belongs to. Deleting or editing a sent invoice breaks the trail your return depends on.
• Outside VAT countries. The United States has no VAT; sales tax rules differ by state, and the ledger mechanics above still apply.

What to hand your accountant

Whether or not you keep the ledger yourself, a clean hand-off makes the return quicker and cheaper to prepare:

• Every sales invoice and credit note for the period, numbered without gaps.
• A per-rate VAT breakdown and the customer's VAT number on each business invoice.
• Every supplier bill, with the supplier's VAT number and the VAT amount.
• Payments received and made, so receivables and payables can be matched.
• All of it in a format they can import, such as CSV.

Our guide to exporting your data to CSV explains what a good export contains. And if you are still working out whether you need full accounting software or an invoicing tool plus an accountant, read invoicing app or accounting software: which one do you need? Where the invoices come from matters too: a clean quote-to-invoice flow keeps the lines and tax right from the start.

Frequently asked questions

What is a general ledger in simple terms?

It is the master record of every money event in the business, sorted into accounts like bank, revenue, VAT and costs. Each event is entered as a debit and a credit of equal size, so the books always balance.

What is the difference between the AR and AP ledgers?

Accounts receivable tracks what customers owe you. Accounts payable tracks what you owe suppliers. Both are detailed lists that roll up into one line each in the general ledger.

How often do I file a VAT return?

It depends on your country and your turnover. Monthly and quarterly returns are common, and some countries allow a yearly return for small businesses. Your tax authority or accountant can confirm your period.

Can I prepare a VAT return from my invoices alone?

Not quite. Sales invoices give you output VAT, but you also need your supplier bills for input VAT, and any credit notes on both sides. With those three in order, the return itself is a short calculation.