SELLING ACTIVITIES

APPLICATION OF VAT ON SALES AND THE RELATED ACCOUNTS

FOR SALES ON CASH

1. Sold merchandise for cash to Matero Convenience Center, P190,000. VAT is 12% .

Exclusive:
Cash in Bank P 212,800
Sales P 190,000
Output Tax 22,800
Observation:

The actual amount of merchandise we sold is However, we add 12% VAT to our sales which is
P22,800 (P190,000 x 12%). Thus, we collect P212800 (P190,000 + P22,800). The amount of
P22,800 which we add to our sales is called and "Output Tax". It has a normal balance of a credit
being a liability account.

Inclusive:
Cash in Bank P 190,000
Sales (190,000/ 1.12) P 169,642.86
Output Tax (P 169,642.86 x .12) 20,357.14

RECEIVED MERCHANDISE SOLD FOR CASH AND RETURNED BY A CUSTOMER

2. Received P6,000 worth of merchandise returned by Matero Convenience Center due to

bad order. It was not replaced, so it is refunded. VAT is 12%.

Exclusive:
Journal Entry:

Sales Returns & Allowances P 6,000

Output Tax ( 6,000 x .12) 720
Cash in Bank P 6,720

Observation:
When we received the P6,000 worth of merchandise returned by our customer, we also have
to remove the 12% VAT therefrom. Since output tax has a normal balance of a credit being a
liability, it is also being debited by p 720 to effect the decrease (P6,000 x 12%).

Inclusive:
Sales Returns & Allowances (6,000/1.12) P 5,357.14
Output Tax (5,357.14 x.12) 642.86
 Cash in Bank P6,000

SALES ON ACCOUNT

3. Sold merchandise on account to E, Detoya & Sons, P180,000. 12% VAT. Term: 2/10,
N/30.

Exclusive:
Journal Entry:

Accounts Receivable P 201,600

Sales P 180,000
Output Tax 21,600

Inclusive:
Accounts Receivable P 180,000
Sales (180,000/1.12). P 160,714.29
Output Tax (180,000/1.12) x .12) 19,285.71

RECEIVED MERCHANDISE SOLD ON ACCOUNT AND RETURNED BY A CUSTOMER

4. Received P10,000 worth of merchandise returned by E. Detoya & Sons and was not
replaced. VAT is 12%
Exclusive:
Journal Entry:
Sales Returns & Allowances P 10,000
Output Tax 1,200
Accounts Receivable P 11,200

Inclusive:
Journal Entry:

Sales Returns & Allowances (10,000/1.12) P 8,928.57

Output Tax (10,000/1.12) x .12) 1,071.43
Accounts Receivable P 10,000

COLLECTED THE ACCOUNT WITH A DISCOUNT

5. Collected the account of E. Detoya & Sons within the discount period.

Exclusive:

Journal Entry:
 Cash in Bank P 186,592
Sales Discounts 3,400
Output Tax 408
Accounts Receivable P190,400

Observation:
The sales discount availed is P3,400 (P180,000 – P10,000 = P170,000 x 2% = P3,400) and Output
Tax is P408 (P3,400 x 12%)

As a result, Output Tax registers a credit balance of P42,072 (P22,800 + 21,600- 720 -1,200-408)
or it can be gleaned from the T-account below:

Output Tax

3) 720 22,800 1)
4). 1,200 21,600 2)
5). 408
____________________________________
2,328 44,400
___________________________________________
42,072
=======

Inclusive:

Cash in Bank P 166,600

Sales Discounts (170,000/1.12 x .02) 3,035.71
Output Tax (3,035.71 x .12) 364.29
Accounts Receivable 170,000

CLOSING OF THE INPUT TAX AGAINST OUTPUT TAX

The Input Tax of P 19,044 is closed against Output Tax of P42,072 and the difference of P23,028
is the VAT Payable. In an instance wherein Input Tax shows a bigger balance than the Output
Tax, the amount of difference is called Prepaid Tax. This is being brought forward to the next
month. No remittance until Output Tax exceeds Input Tax.

Exclusive:
Output tax 42,072
Less: Input tax 19,044
VAT Payable 23,028
======
Journal Entry:

Output Tax P42,072

Input Tax P19,044
VAT Payable 23,028

REMITTANCE OF VAT PAYABLE TO THE BUREAU OF INTERNAL REVENUE

VAT Payable of P23,028 represents the amount that we should remit to the Bureau of Internal
Revenue.

Journal Entry

VAT Payable P23,028

Cash in Bank P23,028

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