How accounting totals are rounded
Let’s break it down with an example:
Imagine you’re charging £100.00 per hour for a lesson. But the Lesson only lasts 20 minutes (which is one-third of an hour). So, you charge one-third of £100.00, which is £33.33.
Next, we need to figure out how much of that £33.33 is the actual price (called the net amount) and how much is tax (VAT). In this case, VAT is 20%.
Here's how it works:
1. Work out the net price:
We divide £33.33 by 1 + the tax rate (1 + 0.20 = 1.2).
So, £33.33 ÷ 1.2 = £27.775, which gets rounded up to £27.78.
Note: When you add tax to a price, you're increasing it by a percentage of the original price. So, to include VAT in a price: 100% of the original price is represented by 1.
2. Work out the tax:
Take the total price (£33.33) and subtract the net price (£27.78).
So, £33.33 - £27.78 = £5.55 tax.
Note: The tax won’t always be exactly 20% of the net amount because of rounding. But this small difference is normal and happens in all cases like this.