Chapter-7: Accounting for

Merchandising Operations
Merchandising Operations

Recording Purchases of Merchandise

Recording Sales of Merchandise

Inventory Systems

Value Added Tax

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VALUE ADDED TAX
 is a tax levied by the government to
certain providers of goods and services.
• The revised tax law (TRAIN ACT)
effective January 2018 requires a 12% VAT
to be paid, aside from income tax, the
moment gross sales or gross receipts hit
the P3M threshold.

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INPUT TAX
 Each time a purchase is made and a 12%
VAT is included, buyers pays two items –
cost of the merchandise purchased and
the tax. Aside from purchases (or nay
asset bought), an Input Tax (VAT) account
should also be debited.

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OUTPUT TAX
 Each time a sale or service is made by a
VAT registered business or practitioner, a
12% VAT is charged to the customer or
client increasing the amount to be
collected which is credited to the Output
TAX (VAT) account.

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VAT PAYABLE
 The two accounts: Input Tax and Output
Tax are closed every month and the
difference may represent a Tax Payable or
Deferred Tax.

Output > Input = VAT Payable

Output < Input = Deferred Tax

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VAT PAYABLE
 VAT is payable within 25 days from the
close of each quarter.
 Businesses or practitioners who are Vat
registered must prominently show the
inclusion of the 12% tax in the invoice
price.

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Illustration:
Assume Alonzo Shoe Palace, a VAT-
registered company, bought goods on
account for P22,400 (VAT inclusive) from
Marikina Shoe Store which is also a VAT-
registered entity.
Date Accounts & Explanation F Debit Credit
July 1 Purchases (22,400/1.12) 20,000
Input Tax (20,000 x .12) 2,400
Accounts Payable 22,400
Purchases on account including VAT

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Illustration:
A few days after, Alonzo sold the goods to
Cruz, a customer on account for P33,600.
Date Accounts & Explanation F Debit Credit
10 Accounts Receivable 33,600
Sales (33,600/1.12) 30,000
Output Tax (30,000x.12) 3,600
Cash sales including VAT

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Illustration:
Date Accounts & Explanation F Debit Credit
31 Output Tax 3,600
Input Tax 2,400
VAT Payable 1,200
to record tax liability

VAT Payable 1,200

Cash 1,200
Remittance of tax to BIR

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Illustration (continued):
Assume that the account of Alonzo was
paid less a 2% cash discount.
Date Accounts & Explanation F Debit Credit
31 Accounts Payable 22,400
Purchase discount (20,000x2%) 400
Input Tax (400x12% 48
Cash 21,952
to record payment

Discount should not be based on the total

accounts payable of P22,400 but only on
P20,000.
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Illustration (continued):
Why is there an adjustment to input tax?
This can be explained by the ff. supporting
computation:
Purchases 20,000
Less: 2% discount 400
Net Purchases 19,600
Required VAT (19,600x12%) 2,352
Input VAT recorded 2,400
Adjustment to decrease VAT 48

The short cut is to adjust the VAT based on

the discount (400X.12 = P48)
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Note:
The same procedure is applicable
whenever there are returns or allowances
on either purchases or sales!

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Illustration:
Assume that Alonzo received a debit
memo for goods returned to supplier
amounting to P560.
Date Accounts & Explanation F Debit Credit
Accounts Payable 560
Purchase Returns & Allowances(560/1.12) 500
Input Tax 60
returned defective merchandise

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Illustration:
Assume that Alonzo collected the account
from the customer less 2% discount.
Date Accounts & Explanation F Debit Credit
Cash 32,928
Sales Discounts (33,600/1.12x.02) 600
Output Tax (600x.12) 72
Accounts Receivable 33,600
Collection within the discount period

Discount should not be based on the total

accounts payable of P33,600 but only on
P30,000.
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Illustration (continued):
Assume that Alonzo issued a credit memo
to a customer for goods returned, P1,120.

Date Accounts & Explanation F Debit Credit

Sales Returns & Allowances (1,120/1.12) 1,000
Output Tax (1,000x.12) 120
Accounts Receivable 1,120
to record goods returned by customer

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End of Presentation

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