Commercial rounding difference
The reason behind differences in the final amount of gross and net invoices
Horizontal vs. vertical calculation
In commercial practice, offer and invoice amounts are usually rounded to two decimal places. This can lead to unexpected rounding differences in the cent range: Depending on whether the value-added tax amounts are rounded using the
- horizontal method or
- vertical method.
Minor deviations between the final amount shown in the transaction and the expected result may occur.
Both calculations comply with invoicing requirements (e.g. according to § 14 UStG in Germany) and are therefore accepted by the tax authorities.
An example of the horizontal method
Here, the value-added tax is calculated and rounded at the item level. In the example, individual net prices and individual VAT amounts are then added together, resulting in individual gross amounts. These together then constitute the total gross amount.
| Description | Net Price | VAT (19%) | Gross Price |
|---|---|---|---|
| Product A | $9.99 | $1.90 ** | $11.89 |
| Product B | $19.50 | $3.71 ** | $23.21 |
| Total | $5,61 | $35.10 |
** Rounded from $1.8981 and $3.705
An example of the vertical method
In this calculation, the net prices are first added together. Then the tax is determined from this. This calculated and rounded amount then yields the total gross amount.
Although the amounts within the calculations are identical, we have a difference of one cent. Even though it might seem odd, this is not a calculation error. The different calculation methods lead to a slightly different result.
| Description | Net Price | VAT (19%) | Gross Price |
|---|---|---|---|
| Product A | $9.99 | $1.8981 | $11.8881 |
| Product B | $19.50 | $3.705 | $23.205 |
| Total | $5,60 ** | $35.09 ** |
** Rounded from $5,6031 and $35,0931
freispace uses the horizontal method for VAT calculation. This enables the use of multiple VAT rates in one document.
Calculation in freispace
For the calculation of VAT, we use the horizontal method. With the horizontal method, VAT is calculated from the net unit price. The value is symmetrically rounded to two decimal places. Then the VAT is multiplied by the quantity of the invoice line.