CASE B: VAT inclusive (VAT is already part of the cost of the item purchased/sold.)

TransactionsJournal Entries

1. Purchased merchandise, P10,000 VAT-inclusive, on terms 2/10 n/30PurchasesInput Tax Accounts Payable(P10,000/1.12 = P8,928.57)(P8,928.57 x 0.12) = P1,071.43)

8,928.571,071.43

10,000.00

2. Sold merchandise, P18,000 VAT-inclusive, on terms 2/10 n/30Accounts Receivable Sales Output Tax(P18,000/1.12 = P16,071.43)P16,071.43 x 0.12 = P1,928.57)

18,000.00

16,071.431,928.57

3. Returned merchandise, P1,000, VAT-inclusiveAccounts Payable Purchase Returns and Allowances Input Tax(P1,000/1.12 = P892.86)(P892.86 x 0.12 = P107.14)

1,000.00

892.86107.14

4. Sales returns, P1,000, VAT-inclusiveSales Returns and AllowancesOutput Tax Accounts Receivable(P1,000/1.12 = P892.86)(P892.86 x 0.12 = P107.14)

892.86107.14

1,000.00

5. Partial payment of P1,500Accounts Payable Cash

1,500.001,500.00

6. Partial collection of P2,000Cash Accounts Receivable

2,000.002,000.00

7. Payment of account within discount periodAccounts Payable Purchase discount Input Tax Cash(P10,000-1,000-1,500 = P7,500)(P10,000-1,000) x 0.02 = P180/1.12)=P160.71)(P160.71 x 0.12 = P19.29)(P7,500 -180 = P7,320)

7,500.00

160.7119.297,320.00

8. Collection of account within discount periodCashSales DiscountOutput Tax Accounts Receivable(P18,000-1,000-2,000 = P15,000)(P18,000-1,000) x 0.02 = P340/1.12) = P303.57(P303.57 x 0.12 = P36.43)(P15,000-340 = P14,660)

14,660.00303.5736.43

15,000.00

At the end of the month, the balances of Input Tax and Output Tax are compared as follows:Output tax (VAT on sales)P xxLess: Input tax (VAT on purchases) xx DIFFERENCE P xx

If the difference is positive (Output tax > Input tax), then the difference is credited to VAT payable. If the difference is negative (Output tax < Input tax), then the difference is debited to Creditable Input Tax or Excess of Input Tax over output Tax.

To illustrate, based on transactions in CASE A (VAT-exclusive) above, the succeeding journal entries would be:

Output Tax Input Tax VAT PayableTo close Input Tax and output Tax(P2,160-120-40.80 = P1,999.20)P1,20-120-21.60 = P1,058.40)P1,999.20-1,058.40 = P940.80)

1,999.20

1,058.40940.80

VAT Payable CashRemittance to BIR

940.80

940.80

If the remittance happened at the end of the month, the compound journal entry is as followsOutput Tax Input Tax CashRemittance to BIR

1,999.20

1,058.40940.80

Assuming Input Tax is P1,999.20 and Output Tax is P1,058.40, the journal entry would be:Output TaxCreditable Input Tax/Excess of Input Tax Over Output Tax CashTo close Input Tax and Output Tax

1,058.40940.80

1,999.20