I have a petty cash account - say I withdraw £200 and place it into my petty cash box, which is represented by that account. In the UK, it's common to use journal entries for recording transactions. For example, I recently spent £120 on office supplies, £20 of which was VAT.
When recording this via a journal, I credit the petty cash account by £100 and apply a 20% VAT code on the same line. I then debit office expenses using the same approach. However, this results in my petty cash account only decreasing by £100, not £120—meaning the cash balance is overstated by £20.
In short: Journal entries in QBO allow VAT codes, which implies that VAT will be handled correctly across all affected accounts. However, when you apply a VAT code to a net amount in a journal, the VAT portion is posted to the VAT control account, but the cash account is only reduced by the net amount, not the gross amount.
This results in an overstated cash balance, which contradicts basic accounting principles - especially in cash-based accounting systems.
I’ve seen community posts where moderators suggest using the expense feature instead, since it handles VAT correctly. But that doesn’t fix the underlying issue. If the journal entry tool lets you apply VAT codes, it should also reduce the cash account by the full amount spent, including VAT. Right now, it doesn’t, and that leads to inaccurate cash balances, which, can be very serious.
