BIG PICTURE IN FOCUS: SLO Journalized vatable transactions.

METALANGUAGE
In this section, terms used by a vatable entity engaged in merchandising concern type of
business is presented in order to have a common understanding as to how these terms are
being used.

1. VAT output– this is an account title use to record the amount of value added tax
extracted from the invoice price of the revenue as mandated by BIR to entities whose
annual gross income is 3Million or more to be remitted to the BIR every month.
2. VAT Input – this is an account title use to record the amount of value added tax
extracted from the invoice price of the items purchased from another VATABLE
entity/ies which is deducted from the VAT output when the same is remitted to BIR.
3. Net VAT Payable– refers to the excess of VAT output over VAT input to be remitted to
the BIR.
4. Invoice Price- refers to the amount that appears on the invoice of the seller or buyer
which is the basis of the VAT computation. All invoices are VAT inclusive as required by
BIR. If the transaction has a trade discount, then the invoice price is the amount net of
trade discount, w/c means trade discount is not included in the computation of VAT
5. Payee- refers to the person or entity to whom the amount is paid.

Some of the terms were already discussed in the previous lesson. Please refer to the previous
definitions (SLO 1 and 2) in case you will encounter difficulty in understanding the terms use in
this section.

ESSENTIAL KNOWLEDGE
Basically the journal entries that we discussed in the previous lesson for a merchandising
concern are the same, the only difference is the recording of value added tax (VAT). In the
previous lesson the assumption is that the entity is not a VATABLE entity. However, when the
annual gross income of the entity is 3Million and above it is already subject to VAT which is the
main topic of this section.

How do we compute and record Value added tax for revenue and collection
cycle transactions?
These group of transactions refer to sales transactions, collection and returned of MDSE or price
adjustments. Therefore, we are making the entries from the seller’s perspective.

1. VAT is 12% of the invoice price.

ILLUSTRATION 1 : Using the problem in the previous lesson.

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On Feb 2, 2020 sold MDSE amounting to P100,000 terms: COD, less 5% FOB destination freight
prepaid. Freight paid is P6,000.

Explanation: Since there is a trade discount of 5%, convert the list price of P100,000 into an
invoice price by extracting the 5% which is P95,000 (P100,000 x .95%). From the invoice price of
P95,000 extract the VAT using the formula as prescribed by BIR. Invoice price divided by 1.12 x .
12 (P95,000/1.12 x .12=P10,179). The entry to record the above transaction is:
Journal Entry:
Cash. . . . . . . . . . . . . . . . . P95,000
Sales . . . . . . . . . . . . . . . . . . . P84,821
VAT Output . . . . . . . . . . . . . . 10,179
To record cash sales

Explanation: Please take note that the only difference in the entry is the recognition of VAT
which decreases the amount of sales when compared to previous entry of a non-vat entity. A
non-vat entity is subject to another tax rate which will be discuss in your taxation subject.

For the amount of freight paid, the entry shall depend if the payee is a vatable or non-vat entity.
If VATABLE entity the entry is:

Freight Out . . . . . . . . . . . . . . . P5,357

VAT Input . . . . . . . . . . . . . . . . 643
Cash . . . . . . . . . . . . . . . . . . . . . . . . . P6,000
Payment of freight charges.

Explanation: Again please note that the amount paid is still P6,000 but the amount of freight
out recognized is decreased equivalent to the VAT input being extracted (P6,000/1.12 x.12 =P
643). Why input but not output? Remember the entity is the buyer not the seller, in contrast
with the sales transaction.

ILLUSTRATION 2:
Suppose in the above transaction, the customer return some defective merchandise with a list
price of P5,000.
First convert the list price of P5,000 into invoice price which is P5,000 x. 95% = P4,750. Then
compute the VAT output of the returned merchandise which is P4,750/1.12 x .12 =P509. The
entry is:

Sales Returns and Allowances . . . . . . . . . . . . P4,241

Vat Output . . . . . . . . . . . . . . . . . . . . . . . . . . . 509
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P4,750
Refund to customer for the returned of defective MDSE.

Explanation: Again the only difference in the entry is the amount of sales returns and
allowances which is decreased equivalent to the amount of VAT output being recognized. There

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is a need to decrease the VAT output (debit) since the amount of sales is also decrease because
of the returns.

ILLUSTRATION 3:
On Feb. 3, 2020 sold MDSE amounting to P80,000 terms: 2/10, n/30 FOB Shipping point freight
collect.

Journal Entry:
Accounts Receivable . . . . . . . . P80,000
Vat Output . . . . . . . . . . . . . . . . . . . P 8,571
Sales . . . . . . . . . . . . . . . . . . . . . . . . . 71,429
Terms: 2/10, n/30 FOB Shipping point freight collect. (you can use the terms as your
explanation)

Explanation: Instead of recognizing sales of P80,000 the amount of sales is only P71,429
because of the amount of VAT output which is extracted from the invoice price of P80,000. This
VAT output is remitted to BIR after deducting the amount of VAT input that the entity
recognized in the same period. No entry for freight because its shipping point and freight
collect.

Suppose in the above transaction, the customer will return defective MDSE worth P10,000.
Journal Entry:
Sales Returns and Allowances . . . . . . P 8,929
Vat Output . . . . . . . . . . . . . . . . . . . . . 1,071
Accounts Receivable. . . . . . . . . . . . P10,000
Adjustment made for the returned of defective MDSE

Explanation: Again the only difference in the entry is the amount of sales returns and
allowances which is decreased equivalent to the amount of VAT output being recognized. There
is a need to decrease the VAT output (debit) since the amount of sales is also decrease because
of the returns but the amount of accounts receivable is still the same whether the entity is
vatable of non-vatable.

If the customer’s account will be collected within the discount period the entry will be:
Cash (P70,000 x .98). . . . . . . .P68,600
Sales Discount. . . . . . . . . . . . 1,250
VAT output . . . . . . . . . . . . 150
Accounts Receivable . . . . . . . . . . . . P70,000
Collection of account within the discount period.

Explanation: The only difference is the amount of sales discount being recognized. If the entity
is not vatable then the amount of sales discount is P1,400, however since it is a vatable entity
the amount of sales discount should be P1,250 (P1,400/1.12) and the amount of decrease in

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VAT output is P150 which is (P1,250 x.12). Again there is a need to reduce the VAT output
because the amount of sales is also decreased equivalent to the sales discount granted.

What if collection is beyond the discount period?

Cash . . . . . . . . . . . . . . P70,000
Accounts Receivable . . . P70,000
Collection of account beyond the discount period
(note that the sales discount is forfeited)

Explanation: The entry is the same whether it is vatable or not because there is no decrease in
sales when it is paid beyond the discount period since the discount is already forfeited.

ILLUSTRATION 4:
On Feb. 5, 2020 sold MDSE amounting to P75,000 terms: 2/10, n/30 FOB destination freight
collect. Amount of freight paid by the buyer is P3,700.

Journal Entry:
Accounts Receivable . . . . . . . . P75,000
Sales . . . . . . . . . . . . . . . . . . . . . . . . P66,964
Vat Output . . . . . . . . . . . . . . . . .. 8,036
Terms: 2/10, n/30 FOB destination freight collect.

Explanation: In this case, the freight terms is freight collect, therefore the buyer pays the freight
cost but it is the responsibility of the seller to pay because of the transportation arrangement of
FOB destination. So, the buyer shall seek reimbursement from the seller for the freight paid.
Instead of collecting from the buyer P75,000 only P71,300 has to be collected because of the
freight that was paid by the buyer. The entry to record the freight shall depend whether the
entity to whom this freight is paid is VATABLE or not. If vatable then the entry is:
Freight Out . . . . . . . . . . . P3,304
Vat Input . . . . . . . . . . . . 396
Accounts Receivable . . . . . . . P3,700
To recognize freight paid by the buyer.

If non-vat entity then the entry is:

Freight Out . . . . . . . . P3,700
Accounts Receivable. . . . . . P3,700
To recognize freight paid by the buyer.

Suppose in the above transaction, the customer will return defective MDSE worth P5,000.
Journal Entry:
Sales Returns and Allowances . . . . . . P4,464
VAT Output . . . . . . . . . . . . . . . . . . . . 536

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 Accounts Receivable. . . . . . . . . . . . P5,000
Adjustment made for the returned of defective MDSE

If the customer’s account will be collected within the discount period the entry will be:
Cash . . . . . . . . . . . . . . . P64,900
Sales Discount. . . . . . . . . . . . 1,250
Vat Output . . . . . . . . . . . . . . 150
Accounts Receivable . . . . . . . . . . . . P66,300
Collection of account within the discount period.

What if collection is beyond the discount period?

Cash . . . . . . . . . . . . . . P66,300
Accounts Receivable . . . P66,300
Collection of account beyond the discount period
(note that the sales discount is forfeited)

Explanation: Why is the balance of A/R is P66,300? Answer (P75,000 less amount of return
gross of VAT P5,000 less P3,700) freight paid by the buyer.
Why is the sales discount is P1,250? Answer (P70,000 x .02=P1,400/1.12) the computation of
discount should be based on the amount of receivable (P75,000-5,000) do not consider the
P3,700 because that is the freight paid by the buyer reimbursed from the seller.

How to record purchase of MDSE and payment cycle transactions if it is a

VATABLE entity?

These group of transactions refer to purchase of MDSE transactions, payment of account and
returned of MDSE or price adjustments to supplier. Therefore, we are making the entries from
the buyer’s perspective.

ILLUSTRATION 5. On Feb 1, 2020 purchased MDSE amounting to P70,000 terms: COD, less 5%
FOB destination freight prepaid. Freight paid is P2,000.

Since the term has a trade discount, convert the list price of P70,000 into an invoice price
(P70,000 minus (P70,000 x .95)= P66,500. Always remember that trade discount is not
recorded.

Using the periodic inventory system the;

Journal entry:
Purchases . . . . . . . . . . . . . . .. . . P59,375
VAT Input . . . . . . . . . . . . . . . . . 7,125

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 Cash . . . . . . . . . . . . . . . . . . . . P66,500
Purchase MDSE Terms : COD less 5%

Suppose in the above transaction, defective MDSE worth P3,000 at list price was returned to
supplier. Convert the list price into invoice price (3,000 x .95%)
Journal Entry:
Cash . . . . . . . . . . . . . . P2,850
Purchase Return and Allowances P2,545
Vat Input . . . . . . . . . . . . . . . . . . . 305
Refund from supplier for the returned of defective MDSE.

ILLUSTRATION 6. On Feb. 2, 2020 bought MDSE amounting to P55,000 terms: 2/10, n/30 FOB
Shipping point freight collect. Amount of freight paid P2,500.

Journal Entry:
Purchases. . . . . . . . P49,107
VAT Input. . . . . . . . 5,893
Account Payable. . . . . . . . . . . P55,000
Terms: 2/10, n/30 FOB Shipping point freight collect (you can use the terms as a brief
description of the transaction)

Explanation: There is an entry for the freight because its shipping point and freight collect. It is
the responsibility of the buyer to pay the freight and because it’s freight collect it was the buyer
who pays the freight. Again the entry shall depend whether the payee is a vatable entity or not.
If non vat entity then the entry is:

Freight In. . . . . . P2,500

Cash. . . . . . . . . . . . . P2,500
Payment of freight charges.

Suppose in the above transaction, the buyer will return defective MDSE worth P5,000.
Journal Entry:
Accounts Payable . . . . . . P5,000
Purchase Returns and Allowances. . . . . . .P4,464
VAT Input . . . . . . . . . . . . . . . . . . . . . . . . . . 536
Adjustment made for the returned of defective MDSE

Explanation: Take note that the amount debited is Accounts Payable stated at gross of VAT,
there is reduction of liability because the MDSE returned was previously bought on credit,
therefore the obligation to the supplier is reduce by P5,000 however the amount of purchase
returns and allowance is reduced equivalent to the amount of input vat (credit) because there is
a decrease of purchases.

If the account will be paid within the discount period the entry will be:

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Accounts Payable Cash . . . . P50,000
Cash (P50,000 x .98) P49,000
Purchase Discount 893 (50,000 x .02=P1,000/1.12)
VAT Input . . . . . . . . . . . . . . . . . 107
Payment of account within the discount period.

What if payment is made beyond the discount period? The entry is:
Accounts Payable . . . . . . P50,000
Cash . . . . . . . . . . . . . . . .. . P50,000
Payment of account beyond the discount period
(note that the purchase discount is forfeited)

ILLUSTRATION 7:
Assume that the entity bought and equipment for office use from a vatable entity on credit
amounting to P60,000. The entry is:
Office Equipment .. . . . . . . . P53,571
Vat Input . . . . . . . . . . . . . . . 6,429
Accounts Payable .. . . . . . . . . . . . . P60,000
Purchase of office equipment on credit

If the account is paid within a discount period assuming a discount of 2% then the entry is:
Accounts Payable . . . . . . . . . . . . P60,000
Office Equipment . . . . . . . . . . . . . .. P 1,071 (60,000 x. 02= P1,200/1.12)
Vat Input . . . . . . . . . . . . . . . . . . . . . . 129 (P1,071 x .12)
Cash . . . . . . . . . . . . . . . . . . . . . . . . . 58,800

Explanation: The discount of 2% is not credited to purchase discount because the item bought
is not a merchandise, it is an asset. In addition you have to extract the VAT input portion of the
discount to reduce the amount of input tax.

QUESTIONS
1. How much is the cost of the equipment?
Answer: P 52,500. (P53,571 – P1,071)

2. How much should be the amount of VAT input if the cost of the equipment net of VAT is
P52,500?
Answer: P52,500 x .12 = P6,300

3. To check if our answer in number 2 is correct.

Vat Input . . . . . . . . . . . . . . P6,429
Less: VAT input. 129 (from discount)
Net Amount of VAT input. P6,300

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 4. Why is the amount paid of P58,800 differ from the cost of the equipment (P52,500)?
Answer: Because of the Vat input being recognized (P6,300). This amount can no longer
be part of the cost of equipment because this was used in the payment of VAT output. If
the equipment is not bought from a vatable entity then the cost of the equipment shall
equal to the amount paid which is P58,800 (60,000-1,200).

ILLUSTRATION 8:
Assume that the entity purchased supplies for office use from a vatable entity amounting to
P20,000 terms: 2/10, n/30, then the entry is:
Supplies . . . . . . . . . . . . . . P17,857
Vat Input . . . . . . . . . . . . . 2,143
Accounts Payable . . . . . . . . . . . . P20,000
Acquired supplies with terms: 2/10, n/30

If the account is paid within a discount period then the entry is:
Accounts Payable . . . . . . . . . . P20,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P19,600 (20,000 x .98)
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . 357 (400/1.12)
Vat Input . . . . . . . . . . . . . . . . . . . . . . . . . . 42 (357 x .12)
Full payment of account.

Explanation: The discount of 2% is not credited to purchase discount because the item bought
is not a merchandise, it is a supplies (non-merchandise). In addition you have to extract the VAT
input portion of the discount to reduce the amount of input tax.

If the account is paid beyond the discount period then the entry is:
Accounts Payable . . . . . . . . . . . P20,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . P20,000
Full payment of account.

REMINDER
If an entity purchased items from a non-vat entity there is no Vat input to be recognized.

How to determine the amount of VAT to be paid to the BIR every month?

At the end of the month the entity shall extract from the VAT Output and VAT Input general
ledger the amount of VAT output and VAT input balance in order to determine the net vat
payable. For purpose of illustration let us post selected transaction from the above illustration.
The general ledger is shown below:

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VAT output has a credit balance of P24,370. The normal balance of VAT output is credit because
this is a liability of the entity to the government which should be paid every month (there is a
schedule set by the BIR). In the absence of VAT input, this is the amount to remitted to the BIR.

VAT input has a debit balance of P21,510. The normal balance of VAT input is debit balance, this
is considered as an asset because this can be used to reduce the amount of VAT output to be
paid to the BIR. However, for entities who do not have output because they belong to zero rated
vatable entities, VAT input can be used to pay other tax liabilities but with the approval first
from the BIR. In other words the entity shall seek approval before claiming it as a deduction
from other tax liabilities.

In the above illustration, the net vat payable is PP2,860 (P24,370 – 21,510). This is the amount
to be remitted to the BIR.

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QUESTION
Is there a possibility that the VAT input balance will be greater than the VAT output?
Answer : Yes, if the computation of VAT output is not correct, No, if the entity follow and
accurately compute the amount of VAT output.

LET’S CHECK
Activity VAT 1. For the following sales transactions compute the amount of VAT output.
Transactions Terms VAT Output
1. Sold merchandise for P 120,000 Cash 12,857
2. Sold merchandise for P 80,000 2/10, n/30 8,571
3. Sold merchandise for P200,000. Less:10%,5% 18,321
COD
4. Sold merchandise for P50,000 Less: 5% 2/10, 5,089
n/30
5. Sold merchandise for P60,000 n/30 6,429

Activity VAT 2. For the following transactions compute the amount of VAT input.

Transactions Terms Vat Input

1. Bought merchandise for P75,000 Cash 8,036
2. Bought a delivery Van for P500,000 2/15, n/60 53,571
3. Purchase merchandise for P150,000 Less:5% 3/10, 15,268
n/45
4. Purchase supplies for office use for P15,000 n/20 1,607
5. Purchase merchandise for P140,000 3/10, n/60 15,000

LET’S ANALYZE
Activity VAT 3. Compute the value of the following
Account Gross Value Amount net of VAT Output/Input
Sales P5,500,000
Sales discount 180,000
Sales Returns & 200,000
Allow
Purchases 3,500,000
Purchase discount 220,000
Purchase Returns & 75,000
Allowances
Freight In 25,000
Determine the amount of net vat payable.

YOUR TURN
Activity VAT 4. Prepare journal entries to record the following transactions.
Reach Company  had  the following transactions for the year.

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a.  Total credit sales of P6,000,000 gross of VAT 
b.  Total returns gross of VAT of P200,000 
c.   Total collection from credit sales of P5,500,000. Amount of sales discount availed by the
customers is P250,000 gross of VAT.

Also Reach Company  had  the following transactions for the year .
a. Total purchases on credit net of VAT of P3,000,000
b. Total purchase returns net of VAT P300,000
c. Total amount paid is P2,500,000 net of discount. The amount of discount is P350,000 net of
VAT.

Assuming Reach has no other transactions that may affect the VAT output and input, how
much is the net vat payable? ___________.

THIS IS THE END OF YOUR LESSON IN FAR 111. I HOPE YOU LEARN SOMETHING FROM THIS
COURSE.

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