Tax 302 – Business and Transfer Tax

Prepared by: Mark Paul I. Ramos

MODULE 4
Accounting for Value-Added Tax
VAT Registration & Compliance Requirements

INTRODUCTION
This module discusses on how transactions subject to Value-added tax as well exempt
from VAT will be recorded in the books of the taxpayer. This will also discuss the pro-forma
journal entries for the recording of different transactions. This module will also tackle about
the registration process of VAT Taxpayers, application and cancellation, invoicing, and filing
and payment of applicable BIR forms.

INTENDED LEARNING OUTCOMES

ILO 1 – Understanding the concepts regarding the recording of VAT transactions to the books
of accounts and registration and compliance to the BIR
ILO 2 – Application of pro-forma journal entries used on different VAT transactions, invoicing
requirements, and filing and payment of BIR forms

ACCOUNTING FOR VALUE-ADDED TAX

Different VAT Accounts

The account titles that are commonly used in the books of a VAT-taxable person are
the Output Tax, Input Tax, and the VAT payable.

Output tax is an account title used by a VAT registered seller, transferor or lessor for
the VAT due on a sale, lease or exchange of taxable goods, properties or services. It is
classified as a current liability of the seller.

Input tax is an account title used by a VAT registered buyer for the VAT on a purchase,
lease or exchange of taxable goods, properties or services. It is classified as a current asset
of the buyer.

VAT payable is an account title that pertains to the amount payable by the VAT
registered seller to the Bureau of Internal Revenue. It represents the excess of the output tax
over the creditable input tax. The account VAT payable is classified as a current liability of the
seller.

In the case of importation of goods, the importer shall pay the VAT payable on the
importation. Such tax paid on the importation shall serve as an input tax which is also
creditable against the output tax.

If the total income taxes exceed the total output taxes in a given quarter, the excess
shall be carried over to and creditable in the succeeding quarter.

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 Tax 302 – Business and Transfer Tax
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Basic Transactions and Accounting Entries

Illustration
Teendeera, VAT registered taxpayer, sold in cash to Mommy Mely certain kinds of
merchandise. The amount indicated in the invoice is P6,720. Subsequently, Mommy Mely sold
on account the same goods to Papa Billy for P11,200, who later on sold them in cash to Vie
Billy, the ultimate customer, for P17,920.

Requirements: Assuming all amounts are inclusive of VAT

1. Record the Journal entries in the sales book of Teendeera
2. Record the accounting entries in the purchase and sales books of Mommy Mely
3. Compute the VAT payable by Mommy Mely
4. Record the accounting entries and the VAT payable by Papa Billy
5. What is the tax consequence on Vie Billy, the ultimate customer.

ANSWER

1. To record the journal entries in the book of Teendeera

Cash 6,720
Sales 6,000
Output Tax 720

2. To record the accounting entries:

a. In the purchase book of Mommy Mely
Purchases 6,000
Input Tax 720
Cash 6,720

b. In the sales book of Mommy Mely

Accounts Receivable 11,200
Sales 10,000
Output Tax 1,200

3. To compute the VAT payable of Mommy Mely

Output tax 1,200
Less: Input tax 720
VAT Payable 480

4. To record the accounting entries:

a. In the purchase books of Papa Billy
Purchases 10,000
Input Tax 1,200
Cash 11,200

b. In the sales books of Papa Billy

Cash 17,920
Sales 16,000
Output Tax 1,920

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 Tax 302 – Business and Transfer Tax
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c. VAT payable by Papa Billy

Output tax 1,920
Less: Input tax 1,200
VAT Payable 720

5. Value-added tax is a tax on consumption. The seller is the one statutorily liable for the
payment, but the amount of the tax may be shifted or passed on to the buyer.

Being the ultimate customer, Vie Billy shall assume the tax burden because she cannot
pass it anymore to another. Thus, upon purchase he is bound to shoulder the tax of
P1,920.

Different transactions and their respective pro-forma entries

1. To record cash purchases/sales of merchandise
a. In the books of the buyer:
Purchases xxx
Input Tax xxx
Cash xxx

b. In the books of the seller:

Cash xxx
Sales xxx
Output Tax xxx

2. To record the VAT payable at the end of the quarter

Output tax xxx
Input tax xxx
VAT payable xxx

3. To record payment of the VAT to the BIR

VAT Payable xxx
Cash xxx

4. To record purchases/sales on account

a. In the books of the buyer:
Purchases xxx
Input Tax xxx
Accounts payable xxx

b. In the books of the seller:

Accounts receivable xxx
Sales xxx
Output Tax xxx

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 Tax 302 – Business and Transfer Tax
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5. To record collection/payment of sales/purchases on account within the discount period

a. In the books of the seller:
Cash xxx
Sales discount xxx
Output tax xxx
Accounts receivable xxx

b. In the books of the buyer:

Accounts payable xxx
Purchase discount xxx
Cash xxx

6. To record in the books of the buyer the payment of freight on goods purchased on
credit.
a. FOB destination, freight collect
Accounts payable xxx
Cash xxx

b. FOB shipping point, freight collect

Freight in xxx
Input tax xxx
Cash xxx

7. To record return of goods purchased/sold and receipt/payment of cash

a. In the books of the buyer
Cash xxx
Input tax xxx
Purchase returns and allowances xxx

a. In the books of the seller

Sales returns and allowances xxx
Output tax xxx
Cash xxx

8. To record transitional input tax of a new VAT-taxable establishment

Input tax xxx
Merchandise Inventory xxx

9. To record deemed sale transaction on VAT-subject goods for sale which were
withdrawn by the owner for his personal use
Juan dela Cruz, Drawing xxx
Output tax xxx
Inventory xxx

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10. To record presumptive input tax on the purchase of sugar cane by a sugar refinery
Raw materials xxx
Input tax xxx
Cash xxx

11. To record sales of merchandise during the day which consists of VAT-subject and
VAT-exempt goods
Cash xxx
Output tax xxx
Sales-exempt xxx
Sales – taxable xxx

Balance sheet presentation of the accounts

As previously stated, the accounts Output tax and VAT payable are classified in the
balance sheet as current liabilities while the Input tax is a current asset.

At the end of the quarter, if the total Output Taxes exceed the total input taxes, the
balance shall be the VAT payable, while if the result is otherwise, the debit balance of the
Input taxes shall be carried over as tax credit in the following quarter as deferred input taxes.

ILLUSTRATION
The following are the real accounts of Nakamura Enterprises:
Cash 33,196
Accounts receivable 0
Input tax 6,288
Accounts payable 13,440
Output tax 8,364

BALANCE SHEET PRESENTATION

ASSETS LIABILITIES AND EQUITY
Cash 33,196 Accounts Payable 13,440
Accounts Receivable 0 VAT Payable 2,076

Note: The accounts Output tax and Input tax do not appear in the Balance sheet but is netted
to the VAT payable account. If Input tax exceeds Output tax, it will be reflected as Deferred
Input Taxes under Other Current assets and will be used as additional credit to Output tax
next period.

VAT REGISTRATION & COMPLIANCE REQUIREMENTS

Registration of VAT taxpayers

Any person who, in the course of trade or business, sales, barters, exchanges goods
or properties, or engages in the sale of services subject to VAT, shall register with the
appropriate Revenue District Office (RDO) and pay an annual registration fee of P500 for
every separate and distinct establishment or place of business before the start of such

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business and every year thereafter owner before the 31st day of January. The annual
registration is waived starting January 22, 2024.

Separate or distinct establishment shall mean any branch or a facility where the sale
transactions occur.

Branch means a fixed establishment in a locality which conducts sales operation of the
business as an extension of the principal office.

Principle place of business refers to the place where the head or main office is located
as appearing in the corporation’s Article of Incorporation. in the case of an individual, the
principle place of business shall be the place where the head or main office is located and
where the books of accounts are kept.

Warehouse means the place or premises where the inventory of goods for sale are
kept and from which such goods are withdrawn for delivery to customers, dealers, or persons
acting in behalf of the business.

Any person who maintains a head or main office in different branches in different
places shall register with the Revenue District Office which has jurisdiction over the place
where in the main or head office or branch is located.

However, the registration fee shall be paid to any accredited bank in the Revenue
District where such person is registered.

In areas where there are no accredited banks, the same shall be paid to the Revenue
District Office, collection agent, or duly authorized treasurer of the municipality where which
place of business or branches situated.

Mandatory registration
Any person who, in the course of trade or business, sales, barters, exchanges goods
or properties or engages in the sale or exchange of services shall be liable to register if:
1. his gross sales or receipts for the past 12 months other than those that are exempt
have exceeded P3 million; or
2. There are reasons to believe that his gross sales or receipts for the next 12 months
other than those that are exempt will exceed P3 million

Every person who becomes liable to be registered but who fails to register, shall be
liable to pay the output tax as if he were a VAT registered person, but without the benefit of
input tax credits for the period in which he was not properly registered.

Optional VAT registration of VAT exempt persons

Any person who is VAT exempt under the Code and is not required to register for VAT
may elect to be VAT registered by registering with the Revenue District Office the past
jurisdiction over the head office of that person, and pay the annual registration fee of P500 for
every separate and distinct establishment. The annual registration is waived starting January
22, 2024.

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Any person who elects to be registered shall not be allowed to cancel his registration
for the next three years.

The above stated taxpayers may apply for registration not later than 10 days before
the beginning of the calendar quarter and shall pay the registration fee unless they have
already paid at the beginning of the year.

In any case, the Commissioner of Internal Revenue may, for administrative reason,
deny any application for registration.

Once registered as a VAT person, the taxpayer shall be liable to output tax and be
entitled to input tax credit beginning on the first day of the month following such registration.

Any person who has registered VAT as tax type shall be referred to as VAT-registered
person, who shall be assigned only one Taxpayer Identification Number.

Registration of non-VAT or exempt taxpayer

Every person other than those required to be registered as VAT persons, engaged in
any business, shall, on or before the commencement of his business, or whenever he transfers
to another revenue district, register with the RDO concerned within 10 days from the
commencement of business or transfer in the manner prescribed in this section and shall pay
the applicable registration fee of P500 for every separate and distinct establishment or place
of business, if he has not paid the registration fee in the beginning of the taxable year. The
annual registration is waived starting January 22, 2024.

The following are required to register as non-VAT persons and to pay the registration
fee of P500:
1. VAT exempt persons under Section 109 of the Tax Code who did not opt to register
as VAT taxpayers;
2. Individuals engaged in business where the gross sales or receipts do not exceed
P100,000 during any 12-month period (They are required to register but will not be
made to pay the registration fee of P500)
3. Nonstock Nonprofit organizations and associations engaged in trade or business
whose gross sales or receipts do not exceed P3 million for any 12-month period or
in an amount as adjusted thereafter every three years depending on the annual
Consumer Price Index as published by the PSA.
4. Cooperatives other than electric cooperatives. However, they are not required to
pay the registration fee.

Application for registration

The application shall be filed with the revenue district office where the principal place
of business, branch, storage place or premises is located, as the case may be, before
commencement of business or production or qualification as a withholding agent. In the case
of storage places, the application shall be filed within 30 days from the date the aforesaid
premises have been used for storage.

Cancellation of registration
A VAT registered person may cancel his registration for VAT if:

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1. He makes written application and can demonstrate to the Commissioner of Internal

Revenue satisfaction that is gross sales or receipts for the following 12 months,
other than those exempt under the Tax Code, will not exceed P3 million
2. He has ceased to carry on his trade or business, and does not expect to
recommence any trade or business within the next 12 months

Some other instances where a VAT registered person may apply for cancellation of
registration are:
1. a change of ownership, in the case of single proprietorship
2. dissolution of a partnership or Corporation
3. merger or consolidation with respect to the dissolved Corporation
4. a person who has registered prior to planned business commencement but failed
to actually start business

Filing of return and payment of VAT

Every person liable to pay value-added tax shall file a quarterly return of the amount
of his gross sales or receipts within 25 days following the close of each taxable quarter (BIR
Form 2550Q).

The term “taxable quarter” shall be the quarter that is synchronized to the income tax
quarter of the taxpayer.

Monthly VAT declarations of taxpayer, whether large or non-large shall be filed and
the taxes paid not later than the 20th day of the month following the end of each month (BIR
Form 2550M).

Amounts reflected in the monthly VAT declarations for the first two months of the
quarter shall be included in the quarterly VAT return which reflects the cumulative figures for
the taxable quarter.

Payments in the monthly declaration shall, however, be credited in the quarterly VAT
return to arrive at the net VAT payable or excess input tax/ overpayment as of the end of a
quarter.

Beginning January 1, 2023 - Quarterly Filing/Payment

a) Beginning January 1, 2023, the filing and payment required under the Tax Code shall
be done within twenty-five (25) days following the close of each taxable QUARTER
(RR 13-2018).
b) OPTIONAL Filing of Monthly vat return and Payment of Monthly Vat Due under RMC
52-2023 dated and effective May 10, 2023.

While the Tax Code mandates the filing of vat return and payment of vat due on a
quarterly basis, vat-registered persons may continue to file and pay the vat on a
monthly basis. In this regard, the procedures and guidelines set forth in RR 16-2005,
6-2014, RMC 68-2005, and other related issuances regarding the use of BIR Form No.
2550M (monthly vat return) shall continue to apply.

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 Tax 302 – Business and Transfer Tax
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DUE DATES beginning January 1, 2023:

OPTIONAL: Filing and payment of monthly vat return - no due date.
MANDATORY: QUARTERLY filing of vat return - within twenty-five (25) days following the
close of each taxable QUARTER using BIR Form No. 2550Q.
- PENALTY from switching to monthly filing to quarterly filing of vat return or vice
versa: NONE (RMC 52-2023).

 PRIOR to January 1, 2023, filing and payment of monthly vat return [for the first two (2)
months of the Quarter] is also required. The filing and payment shall be made on or before
the 20th day following the end of the month using BIR Form No. 2550M.

ILLUSTRATION
Excel Company has the following records of sales and purchases during the 3rd quarter of the
year:

Sales Purchases
July 620,000 508,000
August 430,000 432,000
September 540,000 314,500

The company had a deferred input tax in June of P6,200.

REQUIRED: Compute the VAT payable for the months of July and August and the quarterly
VAT payable for 3rd month.

July August September Quarterly

Output Tax 74,400 51,600 64,800 190,800
Less: Input taxes
July 60,960 60,960
August 51,840 51,840
September 37,740 37,740
Deferred input from June 6,200 6,200
Deferred input from August 240
Total Input taxes 67,160 51,840 37,980 156,740
VAT due/(deferred input tax) 7,240 (240) 26,820 34,060
VAT paid, July (7,240)
VAT Payable 7,240 - 26,820 26,820

NOTE:
- If the above illustration will be filed before January 1, 2023, there will be a monthly
filing of VAT returns (BIR Form 2550M – July P7,240, and August – zero), as well as
quarterly filing (BIR Form 2550Q – P26,820).
- If the above illustration is filed from January 1, 2023, then there will not be a monthly
filing, instead, it will all be filed under the quarterly filing (BIR Form 2550Q – P34,060).

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Excess Output or Input Tax

If at the end of any taxable quarter the output tax exceeds the input tax, excess shall
be paid by the VAT registered person. If the input tax exceeds the output tax, the excess shall
be carried over to the succeeding quarter or quarters.

Any input tax attributable to the purchase of capital goods or to zero-rated sales by a
VAT-registered person may at his option be refunded or credited against other Internal
Revenue taxes.

There is no other mode of recovering unapplied input taxes, particularly claiming it

outright as deductible expense for income tax purposes.

Place of filing and payment

Except as the commissioner otherwise permits, the return shall be filed with and the
tax paid to an authorized agent bank, Revenue Collection Officer or duly authorized city or
municipal treasurer in the Philippines located within the revenue district where the taxpayers
registered or required to register (Sec 114B, NIRC).

Only one consolidated quarterly VAT return (BIR Form 2550Q) or monthly VAT
declaration (BIR Form 2550M) covering the results of operation of the head office as well as
the branches for all lines of business subject to VAT shall be filed by the taxpayer, for every
period, with the BIR office where said taxpayers required to be registered.

Withholding of creditable value-added tax

The government or any of its political subdivisions, instrumentalities or agencies,
including government-owned or controlled corporations (GOCCs) shall, before making
payment on account of each purchase of goods and services which are subject to the value
added tax imposed in sections 106 and 108 of this Code, deduct a final value added tax at the
rate of five percent of the gross payment thereof.

The 5% final withholding VAT shall represent the net VAT payable of the seller.

The remaining 7% effectively accounts for the standard input VAT for sales of goods
or services to government, or any of its political subdivisions, instrumentalities or agencies
including GOCC's in lieu of the actual input VAT directly attributed or ratably apportioned to
such sales.

If the actual input VAT exceeds 5% of gross payments the excess may form part of the
seller’s expense or cost.

On the other hand, if the actual input VAT is less than 5% of gross payments the
difference must be closed to expense or cost.

Beginning January 1, 2021, the VAT withholding system under this subsection shall
shift from final to a creditable system.

The payment for lease or use of properties or property rights to non-resident owners
shall be subject to 12 percent withholding tax at the time of payment.

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Payments for purchase of goods and services arising from projects funded by Official
Development Assistance (ODA) As defined under Republic Act No. 8182, otherwise known
as the “Official Development Assistance Act of 1996” , as amended, shall not be subject to the
final/creditable withholding taxes as imposed in this subsection.

The VAT withheld shall be remitted within 10 days following the end of the month the
withholding was made.

Invoicing requirements
A VAT registered person shall issue:
1. A VAT invoice for every sale, butter or exchange of goods or properties
2. A VAT official receipt for every lease of goods or properties and for every sale,
barter or exchange of services.

Only VAT registered persons are required to print their TIN followed by the word VAT
in their invoice or official receipts. Said documents shall be considered as a VAT invoice or
VAT official receipt.

All purchases covered by invoices/receipts other than VAT invoice/VAT official receipt
shall not give rise to any input tax.

VAT invoice/official receipt shall be prepared at least in duplicate, the original to be

given to the buyer and the duplicate to be retained by the seller as part of his accounting
records.

Consequence of issuing erroneous VAT invoice/official receipt

If a person who is not VAT-registered issues an invoice or receipt shows his Tax
Identification Number, followed by the word “VAT”, the erroneous issuance should result in
the following:
1. The non-VAT person shall be liable to:
a. the percentage tax is applicable to his transactions
b. VAT due on the transactions without the benefit of any input tax credit
c. a 50% surcharge under Section 248 B of the Tax Code
2. VAT shall be recognized as an input tax credit to the purchaser under Section 110 of
the Tax Code, provided the requisite information required below is shown on the
invoice or receipt.

Issuance of a VAT invoice or VAT receipt on an Exempt transaction by a VAT-registered

person
If a VAT-registered person issues of VAT invoice or VAT official receipt for a VAT-
exempt transaction, but fails to display prominently in the invoice or receipt the words “VAT-
exempt sale”, the transaction shall become taxable and the issuer shall be liable to pay VAT
thereon. The purchaser shall be entitled the claim an input tax credit on his purchase.

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MODULE EXERCISES

1. In order that an invoice will qualify as a VAT invoice or receipt for purposes of claiming
tax credit for input tax, it must contain:
I. The vat registration number.
II. The total amount which the purchaser pays or is obligated to pay the seller
with the indication that such amount includes the vat.
a. Only II
b. Both I and II
c. Neither I nor |I
d. Only I

2. Quarterly VAT return is filed on or before the:

a. 15th day from the end of each quarter
b. 20th day from the end of each quarter
c. 25th day from the end of each quarter
d. 30th day from the end of each quarter

3. Mr. Juan Dela Cruz, VAT-exempt, issued VAT invoice to Pedro, VAT - registered
trader. As a consequence, Mr. Juan Dela Cruz would:
a. Be liable to VAT without the benefit of input tax credit;
b. Not be liable to Vat because he is VAT- exempt;
c. Be liable to percentage tax, VAT, and a surcharge of 50%
d. Not be liable to any business tax but may be liable to income tax.

4. Statement 1: If the sale involves goods, properties or services some of which are
subject to and some of which are VAT zero-rated or VAT-exempt, the invoice or receipt
shall clearly indicate the break-down of the sales price between its taxable, exempt
and zero-rated components, and the calculation of the VAT on each portion of the sale
shall be shown on the invoice or receipt.
Statement 2: The seller has the option to issue separate invoices or receipts for the
taxable, exempt, and zero-rated components of the sale.
a. Statements 1 and 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true

Reference:

Ampongan, O. E. G. (2021), Transfer, Business & Local Taxation (with Practice Set) 13/e

Bureau of Internal Revenue, Value-Added Tax, https://www.bir.gov.ph/index.php/tax-

information/value-added-tax.html

Tabag, E.D and Garcia, E. J. (2023), Transfer & Business Taxation

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