ACCOUNTING FOR VALUE-ADDED TAX

VAT is not entirely a new concept of business taxation but is just another form of tax levied
on a wide range of goods and services. Specifically, it means "tax on the value-added" by every
seller to purchase of goods and services.

The approval Of R.A. 9337 No. 14-2005, removes the VAT exemption of several formerly,
exempt section of our economy. Thus, the burden of taxation is now shared more equitably.
The approval has increased VAT from 10% to 12% effective February 2006.

The difference between our Output Tax, the tax on our sales and Input Tax, the tax on our
purchases is our VAT Payable which will then be remitted to the Bureau of Internal Revenue
within 25 days after the end of each month.

Input Tax and Prepaid Tax are presented in the Current Asset section of the Balance Sheet
while Output Tax and VAT Payable are presented in the Current Liability section of the Balance
Sheet.

The revenue regulation also emphasizes that VAT Input/Output should be shown separately
in the invoices.

PURCHASING ACTIVITY

APPLICATION OF VAT ON PURCHASES AND RELATED ACCOUNTS

FOR CASH PURCHASES

1). Bought merchandise for cash from P. Tao Grocery, P 100,000. VAT is 12%.

Exclusive of VAT:

Journal Entry:
Purchases P 100,000
Input Tax 12,000
Cash In Bank 112,000

Observation:
The actual cost of merchandise purchased was P 100,000. However, our supplier added 12%
VAT to the cost of what we purchased which is P12,000 (P100,000 x 12% = P 12,000). Thus we
pay P112,000 (100,000 + P12,000). The amount of P12,000 which Our supplier added to the
cost of our purchases is called Input Tax. It has a normal balance of debit because it is an Asset.
 Cost 100% 89,285.71
Add: VAT 12% 10,714.29
Payment 112% 100,000.00
Inclusive of VAT:
Purchases (100,000/1.12) P 89,285.71
Input Tax (100,000/1.12) x 12%) 10,714.29
Cash In Bank 100,000

2. Return P5,000 cost of merchandise bought for cash from P. Tao Grocery for not
conforming with order and was not replaced. VAT is 12%.

Exclusive of VAT:

Journal Entry:

Cash In Bank P 5,600

Purchase Returns and Allowances P 5,000
Input Tax 600

Inclusive of VAT:
Cash In Bank P 5,000
Purchase Returns and Allowances(5,000/1.12) P 4,464.29
Input Tax (5,000/1.12)x .12) or (4,464.29 x .12) 535.71

FOR ACCOUNT PURCHASES

3. Bought merchandise on account from J. Alegado Mall, P75,000 plus 12% VAT. Term: 2/10,
N/30.

Exclusive of VAT:
Journal Entry:

Purchases P 75,000
Input Tax 9,000
Accounts Payable P84,000

Inclusive of VAT:
Purchases P 66,964.29
Input Tax 8,035.71
 Accounts Payable P75,000

RETURN OF MERCHANDISE PURCHASED ON ACCOUNT

4) Return P 10,000 cost of merchandise bought on account from J. Alegado Mall for
not conforming with the order and was not replaced. VAT is 12%.

Exclusive of VAT:

Journal Entry:

Accounts Payable P 11,200

Purchase Returns and Allowances P 10,000
Input Tax (10,000 x 12%) 1,200

Inclusive of VAT:

Accounts Payable P 10,000

Purchase Returns and Allowances P 8,928.57
Input Tax (10,000 /1.12)X.12 ) 1,071.43

PAYMENT OF ACCOUNT AT A DISCOUNT

5) Payment of account with J. Alegado Mall within the discount period.

Exclusive of VAT:
Journal Entry:

Accounts Payable 72,800

Purchase discount (72,800 x.02) 1,300
Input tax 156
Cash in bank 71,344

Payment beyond the discount period

Accounts Payable 72,800

Cash in bank 72,800
Observation: The purchase discount availed is P 1,300 (75,000-10,000=65,000 x 2%= 1,300)
and Input tax is P 156 (1,300 x 12%).

Input tax
1) 12,000 600 3)
2) 9,000 1,200 4)
156 5)
____________________________
21,000 1,956
____________________________
19,044
============

INCLUSIVE:

ACCOUNTS PAYABLE 65,000

PURCHASE DISCOUNT (65,000/1.12X.02) 1,160.71
INPUT TAX (1160.71 X.12) 139.29
CASH IN BANK 63,700.00

Payment beyond the discount

Accounts payable 65,000

Cash in bank 65,000