ACCOUNTING FOR A

MERCHANDISING BUSINESS

Value Added Taxes

Special Journals and subsidiary ledgers
 VALUE ADDED TAXES

• Tax on consumption imposed on the sale, barter, exchange or lease of goods or properties and services in the
Philippines.
• It is an indirect tax which is passed to the buyer for the goods, properties or services.
• In the invoice price of goods or services, value added taxes is included, which the seller has the responsibility
to remit the charged VAT to Bureau of Internal Revenue.
• For a sales transaction, output tax should be included whereas for purchase transaction, input tax should be
included.
• For purposes of discussion, a 12% VAT on sales and purchase transactions of inventories will be used.
• 12% VAT is normally incorporated in the price of the goods.
 ILLUSTRATIVE PROBLEM : ACCOUNTING FOR PURCHASES AND
RELATED ACCOUNTS

ABC Company had the following transactions during the month of December 2020:
• On December 1,2020, purchased goods from XYZ Company for P 168,000 terms: 2/10,n/30, FOB
Shipping point. The freight costs paid was P 2,500. VAT is 12% of the purchase price.

ENTRY:
Perpetual System Periodic System

Inventory 150,000 Purchases 150,000

Input tax 18,000 Input tax 18,000
Accounts payable 168,000 Accounts payable 168,000
*168,000/1.12 = 150,000 purchases/inventory
150,000 x 12% = 18,000 VAT

Inventory 2,500 Freight-in 2,500

Cash 2,500 Cash 2,500
 ILLUSTRATIVE PROBLEM : ACCOUNTING FOR PURCHASES AND
RELATED ACCOUNTS

On December 8, 2020, returned goods to XYZ Company worth P 10,000 of defective goods.

ENTRY:
Perpetual System Periodic System

Accounts payable 11,200 Accounts payable 11,200

Inventory 10,000 Purchase returns & allowances 10,000
Input tax 1,200 Input tax 1,200

* 10,000 x 12% = I,200 VAT derecognized

ILLUSTRATIVE PROBLEM : ACCOUNTING FOR PURCHASES AND
RELATED ACCOUNTS

On December 10, 2020, ABC Company paid its accounts to XYZ Company.

ENTRY:
Perpetual System Periodic System

Accounts payable 156,800 Accounts payable 156,800

Inventory 2,800 Purchase Discount 2,800
Input tax 336 Input tax 336
*Cash 153,664 Cash 153,664

*2,800 x 12% = 336 VAT derecognized

 Purchases – December 1 - P 150,00
Less: Purchase returns & allowances ( 10,000)
Amount due before VAT ( Input tax) 140,000
Less: Purchase discount ( 2,800)
Amount due before VAT ( Input tax) 137,200
+ Input tax ( 137,200 x 12%) 16,464
*Amount to be paid with VAT 153,664

Accounts payable Input tax

12/1 168,000 12/1 18,000
12/8 11,200 12/8 1,200

12/10 156,800 12/10 336

12/10 16,464
ILLUSTRATIVE PROBLEM : ACCOUNTING FOR PURCHASES AND
RELATED ACCOUNTS

On December 10, 2020, ABC Company paid its accounts to XYZ Company.

What if ABC Company paid on December 15, 2020?

ENTRY:
Perpetual System Periodic System

Accounts payable 156,800 Accounts payable 156,800

Cash 156,800 Cash 156,800
ILLUSTRATIVE PROBLEM : ACCOUNTING FOR SALES AND RELATED
ACCOUNTS

ABC Company had the following transactions during the month of December 2020:
• On December 11,2020, sold P 50,000 worth of goods for P 60,000, terms: 2/10,n/30. VAT is 12% of the selling price.

ENTRY:
Perpetual System Periodic System

Accounts receivable 67,200 Accounts receivable 67,200

Sales 60,000 Sales 60,000
Output tax 7,200 Output tax 7,200

Cost of goods sold 50,000

Inventory 50,000
 ILLUSTRATIVE PROBLEM : ACCOUNTING FOR SALES AND RELATED
ACCOUNTS

ABC Company had the following transactions during the month of December 2020:
• On December 13,2020, a customer returned defective merchandise with selling price of P 5,600 ( VAT inclusive).
Cost of the goods returned is P 4,000.

ENTRY:
Perpetual System Periodic System

Sales returns and allowances 5,000 Sales returns and allowances 5,000
Output tax 600 Output tax 600
Accounts receivable 5,600 Accounts receivable 5,600
*5,600/1.12 = 5,000 sales returns & allowances
5,000 x 12% = output tax derecognized

Inventory 4,000
Cost of goods sold 4,000
 ILLUSTRATIVE PROBLEM : ACCOUNTING FOR SALES AND RELATED
ACCOUNTS

On December 15, 2020, received payment from the goods sold on December 11,2020.

ENTRY:
Perpetual System Periodic System

Cash 60,368 Cash 60,368

Sales discount 1,100 Sales discount 1,100
Output tax 132 Output tax 132
Accounts receivable 61,600 Accounts receivable 61,600

*1,100 x 12% = 132 VAT derecognized

 Sales – December 1 - P 60,000
Less: sales returns & allowances ( 5,000)
Amount due before discount & VAT (output tax) 55,000
Less: sales discount (1,100)
Amount due before VAT (output tax) 53,900
+ Output tax ( 53,900 x 12%) 6,468
*Amount due from customer with VAT 60,368

Accounts receivable Output tax

12/11 67,200 12/ 13 5,600 12/8 7,200
12/13 600
12/ 15 61,600
12/15 132

12/15 6,468
 VAT PAYABLE OR VAT CREDITABLE
• In the previous discussion of the accounting for purchase and sales transaction of inventories with VAT, it can be
noticed that a 12% output tax is levied on customers and added to the selling price. In the purchase transaction,
12% input tax is being paid to the suppliers in addition to the purchase price. The enterprise should remit to the
BIR the EXCESS OF OUTPUT TAX OVER INPUT TAX.
• Output tax account has a credit balance and the Input tax account has a debit balance ; the excess between the
output tax and input tax is known as the VAT payable. Vat payable is a current liability of the business until it is
remitted to BIR. (normally remitted within 20 days from the end of the month).
• If the input tax account is greater than the output tax account, the excess is recognized as vat creditable. With this,
the enterprise can use it to credit any output taxes to be remitted in the future.
Assuming the input tax account has a balance of P 10,000 and the output tax account has P 25,000 balance, the VAT
payable would be P 15,000. The entry to record the remittance of the VAT payable would be:

Output tax 25,000

Input tax 10,000
Cash 15,000
 SPECIAL JOURNALS

• For a large number of repetitive transactions, it would be impractical to apply such detailed procedures ( journalize
and post entities individually to the general ledger) on a per transaction basis.
• One of the simplest methods of reducing the processing time and expense is to expand the 2-column journal to a
multi-column journal. The additional columns represent a particular frequently used account, thus saving time in
recording transactions. Each column shall be totaled periodically, and only the total is posted to the ledgers, saving a
lot of time and effort.
• To expedite journalizing and posting transactions, most companies use special journals in addition to the general
journal, and subsidiary ledgers in addition to the general ledger.
• Special journals would only be needed only for the types of transactions that occur frequently like receipt and
disbursement of cash and the purchase and sale of merchandise.
 SUBSIDIARY LEDGER

• The necessity of maintaining a separate account for each creditor and debtor is needed, because it would be virtually
impossible to determine the balance owed by an individual customer at any specific time. When there are
substantial number of individual accounts with common characteristics, it is customary to place them in a separate
ledger called Subsidiary Ledgers.
• Subsidiary Ledger is a group of accounts with common characteristics. It frees the general ledger from the details
of individual balances. It is an addition to and expansion of the general ledger.
• General Ledger is the principal ledger which contains all of the balance sheet and income statement accounts. Each
subsidiary ledger is represented by a summary account in the general ledger called a control account. The total of
the balances of the accounts in the subsidiary ledger must agree with the balance of the related control account.
Two common subsidiary ledgers are:
a.) The accounts receivable ledger which accumulates transaction data for individual customers.
b.) The accounts payable ledger which maintains transaction data with individual creditors.
 OVERVIEW OF THE RELATIONSHIP OF SUBSIDIARY
LEDGERS TO THE GENERAL LEDGER

Accounts Receivable = Accounts payable =

60,000 30,000

Customer A = Customer C = Creditor A = Creditor C =

10,000 30,000 5,000 15,000

Creditor B =
Customer B =
10,000
20,000
 SPECIAL JOURNALS

• Special journals typically used in merchandising business are listed below:

TRANSACTIONS WHERE RECORDED

Purchase of merchandise on account Purchase journal

Sale of merchandise on account Sales journal

Receipt of cash from any source Cash receipt journal

Disbursement of cash for any source Cash disbursement journal

• A transaction which cannot be conveniently entered in any of the four special journals shall be recorded in the general
journal.
• Adjusting entries, closing entries and other entries that will not fit the make-up arrangement of the special journals being
Used.
 PURCHASE JOURNAL

• Buying of merchandise for a merchandising business one of the most frequently recorded transactions. Without a
purchases journal, each transaction requires three postings, one to Purchases, another to accounts payable and
another to the creditor’s subsidiary ledger account.
• Purchase journal is restricted to purchases of merchandise on account.

PURCHASE JOURNAL
Date Purchased Terms Inv. No. PR Purchases Input tax Accounts
from (Debit) (Debit) payable
(Credit)
 ILLUSTRATIVE
PROBLEM:
The following are the purchases during the month of October 2020:
October 1 – Purchased merchandise from ABC Company P 33,600, terms:2/10, n/30 with invoice no. 100
October 2 - Purchased merchandise from DEF Company P 56,000, terms: n/30 with invoice no. 3456
October 9 - Purchased merchandise from GHI Company P 112,000, terms:1/10, n/30 with invoice no. 5436
All amounts are inclusive of value added taxes.

PURCHASE JOURNAL
Date Purchased Terms Inv. No. PR Purchases Input tax Accounts
from (Debit) (Debit) payable
(Credit)
October 1 ABC Co. 2/10,n/30 100 30,000 3,600 33,600
2 DEF Co. n/30 3456 50,000 6,000 56,000
9 GHI Co. 1/10,n/30 5436 100,000 12,000 112,000
180,000 21,600 201,600
(501) (502) (201)
 SALES JOURNAL

• Sales journal is generally used solely for recording sales of merchandise on account.

SALES JOURNAL
Date Sold to Terms Inv. No. PR Sales Output Tax Accounts
(Credit) (Credit) receivable
(Debit)
 ILLUSTRATIVE
PROBLEM:
The following are the purchases during the month of October 2020:
October 11 – Sold merchandise to JKL Company , P 224,000, terms: 2/10,n/30 with invoice no. 100
October 13 - Sold merchandise to MNO Company , P 188,160, terms: 1/10,n/30 with invoice no. 101
October 18 - Sold merchandise to QRS Company , P 560,000 terms: 2/10,n/30 with invoice no. 103
All amounts are inclusive of value added taxes.

SALES JOURNAL
Date Sold to Term s Inv. No. PR Sales Output Tax Accounts
(Credit) (Credit) receivable
(Debit)
October 11 JKL Co. 2/10,n/30 100 200,000 24,000 224,000
13 MNO Co. 1/10, n/30 101 168,000 20,160 188,160
18 QRS Co. 2/10,n/30 103 500,000 60,000 560,000
868,000 104,160 972,160
(401) (402) (201)
 CASH RECEIPTS JOURNAL

• Cash receipt journal is a special journal designed to record all transactions whenever any cash is received.
.
CASH RECEIPTS JOURNAL
Date Receive OR No. Cash Sales Accounts Sales Sundries PR Debit Credit
d from (Debit) (Credit) receivable Discount Account
(Credit) (Debit) title
 ILLUSTRATIVE
PROBLEM:
The following are the purchases during the month of October 2020:
October 19 – Sold goods for cash to Lebron Company at P 112,000. Inclusive of 12 % VAT. ( OR No. : 1101).
October 20 – Received P 120,000 as proceeds from the loan from XYZ Finance Company. ( OR No. : 1102)
October 21 – Received additional cash investment from the owner, Kobe Bryant, P 250,000 ( OR No. : 1103)
CASH RECEIPTS JOURNAL
Date Receive OR Cash Sales Accounts Sales Sundries PR Debit Credit
d from No. (Debit) (Credit) receivable Discount Account
(Credit) (Debit) title
October 19 Lebron 1101 112,000 100,000 Output 402 12,000
Co. tax
20 XYZ 1102 120,000 Loans 202 120,000
Finance payable
Co.
21 Kobe 1103 250,000 Kobe 301 250,000
Bryant Bryant,
capital
482,000 100,000
(101) (401)
 CASH DISBURSEMENT JOURNAL

• Cash disbursement is a special journal designed to record all transactions whenever any cash is disbursed.
.

CASH DISBURSEMENTS JOURNAL

Date Paid to CV No. Check Cash Purchase Accounts Purchase Sundries
No. (credit) (debit) payable Discount
(Debit) (credit)
PR Account Debit credit
title
 ILLUSTRATIVE
PROBLEM:
The following are the purchases during the month of October 2020:
October 22 – Purchased goods from XYZ Company for cash, P 448,000. (CV no. 1001 ; Check No. 1001). Inclusive of 12% VAT.
October 23 – Paid the utilities payable to Meralco Co. of P 35,000. (CV no. 1002 ; Check No. 1002)
October 30 – Paid salaries for the month , P 500,000 (CV no. 1003 ; Check No. 1003)

CASH DISBURSEMENTS JOURNAL

Date Paid to CV Check Cash Purchases Accounts Purchase Sundries
No. No. (credit) (debit) payable Discount
(Debit) (credit)
Account title PR Debit credit

October 22 XYZ Co. 1001 1001 448,000 400,000 Input tax 502 48,000

23 Meralco Co. 1002 1002 35,000 Utilities 203 35,000

payable

30 Payroll 1003 1003 500,000 Salaries 504 500,000

Expense
983,000 400,000
(101) (501)