VALUE ADDED TAX
VALUE ADDED TAX (VAT)
• is a tax imposed upon purchase and sale of goods
• although it is included in the amount payable to the seller, it should not be
recorded as an addition to the purchases account of the buyer
• the VAT paid on the purchase of goods is debited on a separate account title
input tax
• likewise, although this tax is added to the amount collectible from the
customer, it should not be recorded as an addition to the sales account of
the seller
• the VAT collected on the sale of goods is credited on a separate account title
output tax
VALUE ADDED TAX (VAT)
• at the end of the month, the output tax is compared against the input tax
• if the output tax is greater than the input tax, the difference is the VAT payable to the
Bureau of Internal Revenue (BIR), the VAT payable is classified as a current liability
• if input tax is greater that the output tax, the difference represents a VAT creditable to
be carried over and applied to future tax outputs
• Computation for VAT Payable:
Total output taxes P xxx
Less: Total input taxes xxx
VAT Payable Pxxx
PRO-FORMA JOURNAL
ENTRIES IN RECORDING VAT
Cash/Accounts Receivable xxx
Sales xxx
Output Tax xxx
1. Sale of Merchandise
2. a. Received
merchandise
returns Sales returns and allowances xxx
b. Allowances Output tax xxx
granted to buyer Cash/Accounts Receivable xxx
for wrong
specification or
defective goods
c. Issued credit memo
to buyer for
merchandise
returns
3. Collection of account Cash xxx
within discount Sales discount xxx
period Output tax xxx
Accounts Receivable xxx
4. Purchase of Purchases xxx
merchandise Input tax xxx
Cash/Accounts Receivable xxx
5. a. Returned defective
merchandise
b. Allowances Cash/Accounts Payable xxx
granted by seller Purchases Returns and
for wrong Allowances
specification or xxx
defective goods Input tax
xxx
c. Issued debit memo
to buyer for
merchandise
returns
6. Payment of account Accounts Payable xxx
within discount Purchase Discount xxx
period Input tax xxx
Cash xxx
7. To record VAT Payable
or creditable Input Output Tax xxx
Tax
Input tax
xxx
a. If output is greater VAT Payable xxx
than input tax
Output Tax xxx
7. To record VAT Creditable Input tax xxx
Payable or creditable
Input tax xxx
Input Tax
b. if Input is greater
than output tax Note: The Creditable input tax is a tax credit to
be applied to the subsequent month. In the
statement of financial position, it is under
other current asset
8. Payment of VAT
VAT Payable xxx
Cash xxx
Illustration 1
Purchase of Merchandise
On June 4, Diamond Trading made credit purchases from Sapphire Enterprises in the
amount of P20,000 plus 12% VAT.
June 4 Purchases 20,000
Input Tax 2,400
Accounts Payable
22,400
Credit purchases plus 12% VAT
Illustration 1
Sale of Merchandise
Diamond Trading sold the goods to Pearl Grocers for P25,000 cash plus 12% VAT.
June 10 Cash 28,000
Sales
25,000
Output tax
3,000
Cash sales plus 12% VAT
Illustration 1
Payment of VAT
Diamond Trading paid VAT on the tenth of the following month.
Before recording payment of VAT on the subsequent month, an entry for VAT should be
made at the end of the month to determine the VAT payable or VAT creditable.
June 30 Output Tax 3,000
Input Tax
2,400
VAT Payable 600
To record Vat Payable for the month
Illustration 1
Payment of VAT
Diamond Trading paid VAT on the tenth of the following month.
Before recording payment of VAT on the subsequent month, an entry for VAT should be
made at the end of the month to determine the VAT payable or VAT creditable.
July 10 VAT Payable 600
Cash
600
To record payment of VAT.
Note: VAT payable is a current liability in the statement of financial position under trade
and other payables.
Illustration 2
Purchase of Merchandise
On January 5, Sardonyx Enterprises purchased merchandise from Peridot Trading on
account in the amount of P224,000 inclusive of 12% VAT on term 2/20, n/60.
January 5 Purchases 200,000
Input Tax 24,000
Accounts Payable 224,000
Credit purchases plus 12% VAT. Term: 2/10,n/30
Computation
Total amount P224,000 Note: Since
P224,000 includes the 12% to
Less: Purchases 200,000 get the
amount of VAT.
(P224,000/12%) _________
Input Tax P 24,000
Illustration 2
Merchandise Returns from Purchase
On January 11, Sardonyx Enterprises returned to Peridot Trading defective merchandise
worth P56,000 inclusive of 12% VAT.
January11 Accounts Payable 56,000
Purchases returns and allowances
50,000
Input Tax
6,000
To record returns and tax applicable to the return.
Computation
Total amount P56,000
Less: Returns 50,000
(P56,000/12%) _________
Input Tax P 6,000
Illustration 2
Sale of Merchandise
On January 20, Sardonyx Enterprises sold merchandise to Topaz Merchandising for
P201,600 cash inclusive of 12% VAT.
January 20 Cash 201,600
Sales
180,000
Output Tax
21,600
To record cash sales plus 12% VAT.
Computation
Total amount P201,600
Less: Sales 180,000
(P201,600/12%) _________
Output Tax P 21,600
Illustration 2
Merchandise Returns from Sale
On January 21, Sardonyx Enterprises received returns from Topaz Merchandising for
P22,400 inclusive of 12% VAT. Sardonyx Enterprise refunded cash for these returns.
January 20 Sales Returns and allowances 20,000
Output Tax
2,400
Cash
22,400
To record merchandise as returns.
Illustration 2
Full Settlement of Account
On January 25, Sardonyx Enterprises settled its account in full to Peridot Trading.
January 25 Accounts Payable 168,000
Cash
164,640
Input Tax
360
Purchase discount
3,000
To record full settlement of account.
Illustration 2
Full Settlement of Account
On January 25, Sardonyx Enterprises settled its account in full to Peridot Trading.
Computation
Purchases
P200,000
Less: Purchases returns and allowances 50,000
Total
P150,000
Multiplied by 2%
.02
Purchase discount P
3,000
Multiplied by 12%
.12
Illustration 2
Full Settlement of Account
On January 25, Sardonyx Enterprises settled its account in full to Peridot Trading.
Note: The input tax is the VAT applicable to the purchase discount. Cash is the
balancing
figure in the journal entry or otherwise computed as follows:
Jan. 5 account payable (credit) P224,000
Less: Jan. 11 account payable (debit) 56,000
Amount of payable (net of returns) P168,000
Less: 2% sales discount
3,360
Cash payment
P164,640
Note: The 2% sales discount of P3,360 includes 12% input tax. To get the sales
Illustration 2
Payment of VAT
Sardonyx Enterprises paid VAT applicable to its transactions on the fifth of the following
month.
Before recording payment of VAT on the subsequent month, an entry for VAT should be
made at the end of the month to determine the VAT payable or VAT creditable.
Jan. 31 Output Tax 19,200
Input Tax
17,640
VAT Payable 1,560
To record VAT payable for the month.
Feb. 5 VAT Payable 1,560
Cash
1,560
To record payment of VAT.
Illustration 2
Payment of VAT
Note: In case the input tax is greater than the output tax, the journal entry to record the
excess of the input tax over the output tax is as follows:
Output tax xxx
Creditable Input Tax xxx
Input tax xxx
The creditable input tax is a tax credit to be applied to the subsequent month. In
the
statement of financial position, it is under Other Current Asset.
END OF SESSION
