VALUE-ADDED TAX

Under Republic Act 9337 (Value-Added Tax Reform Law)

As amended by Republic Act 9361

Value-Added Tax

It is an indirect tax levied on the selling price of goods or services.

General Notes

• e business is required to be registered under the VAT system when its expected annual gross
sales or receipts exceed P1.5 million.

• A VAT-registered business is subject to 12% VAT effective January 1, 2006 based on the gross
selling price.

• e Value-Added Tax is an Input Tax on the part of the Buyer or an Output Tax on the part of
the Seller.

• e firm is allowed to offset against the Output Tax of the current period the excess of Input
Tax over the Output Tax of the previous period.

• e Input Tax is debited by the buyer under the following situations:

a. Purchase of supplies, whether in cash or on credit.

b. Purchase of services on cash basis.

• e Deferred Input Tax is debited by the buyer for purchase of services on credit.

• e Output Tax is credited by the seller for sale of services on cash basis.

• e Deferred Output Tax is credited by the seller for sale of services on credit.

• Every time the buyer pays his account (whether partial or full payment), he debits the Input
Tax account and credits the Deferred Input Tax account. (Computation: Partial/full payment
divided by 9.33333)

• Every time the seller collects an account (whether partial or full collection), he credits the
Output Tax account and debits the Deferred Output Tax account. (Computation: Partial/full
collection divided by 9.33333)

At the End of the Month

• If Output Tax exceeds the Input Tax, the different is credited to VAT Payable, a current liability
under Trade and Other Payables.
 • If Input Tax exceeds the Output Tax, the different is debited to Creditable Input Tax and
carried over to the succeeding month or quarter. For financial statement purposes, the
Creditable Input Tax is presented as a specific line item on the Balance Sheet aer Prepaid
Expenses.

• e Deferred Input Tax is presented as a separate line item aer Creditable Input Tax under
the current asset section of the Balance Sheet.

• e Deferred Output Tax is presented as a current non-trade liability together with VAT
Payable under the trade and other payables group.

BIR Forms Used and Deadline of Filing:

• e monthly VAT return (BIR Form 2550M) must be filed and paid on or before the 20th day
of the month following the taxable month for the first two months of the quarter.

• e quarterly VAT return (BIR Form 2550Q) is to be filed and paid on or before the 25th day of
the month following the close of the quarter.

Formulas in Computing the VAT:

• If the purchase/selling price (P/S) does not include the 12% VAT:

Purchase/Selling Price (w/o VAT) P xxx

Multiplied by: VAT percentage 0.12

Input/Output Tax P xx

• If the purchase/selling price already includes the 12% VAT:

Purchase/Selling Price (with VAT) P xxx

Divide by: 9.33333

Input/Output Tax P xx

Transactions where the VAT is Recorded:

1. Purchase of supplies and tangible fixed assets, whether in cash or on credit.

2. Return of defective supplies.

3. Purchase of services, whether in cash or on credit.

4. Sale of services, whether in cash or on credit.

 5. Partial or full payment of account arising from purchase of services or supplies/fixed assets.

6. Partial or full collection of account arising from sale of services.

Pro-Forma Journal Entries

A. Buyer’s Books:

1. Purchase of supplies (whether in cash or on credit):

Supplies xxx

Input Tax (12% of Supplies account) xx

Cash/Accounts Payable xxx

2. Return of defective supplies:

Cash/Accounts Payable xxx

Supplies xxx

Input Tax (12% of Supplies account) xx

3. Purchase of tangible fixed assets (equipment or furniture and fixtures):

Equipment/Furniture and Fixtures xxx

Input Tax (12% of the tangible fixed asset) xx

Cash/Accounts Payable xxx

4. Partial or fully payment of account (arising from purchase of items):

Accounts Payable xxx

Cash xxx

5. Purchase of repair services for cash:

Repairs and Maintenance Expense xxx

Input Tax (12% of the expense account) xx

Cash xxx
 6. Purchase of repair services on credit:

Repairs and Maintenance Expense xxx

Deferred Input Tax (12% of the expense account) xx

Accounts Payable xxx

7. Partial or full payment of account (services):

Accounts Payable xxx

Input Tax (Amount paid divided by 9.33333) xx

Cash xxx

Deferred Input Tax (amount paid divided by 9.33333 xx

Note: If this is a full payment, the Deferred Input Tax will have a zero balance aer this entry.

B. Seller’s Books

1. Sale of services for cash:

Cash xxx

Output Tax (12% of Service Income account) xx

Service Income xxx

2. Sale of services on credit:

Accounts Receivable xxx

Deferred Output Tax (12% of Service Income account) xx

Service Income xxx

3. Partial or full collection of account:

Cash xxx

Deferred Output Tax (Amount collected divided by 9.33333) xx

Accounts Receivable xxx

Output Tax (Amount collected divided by 9.33333) xx

Note: If this is a full collection, then the Deferred Output Tax will have a zero balance aer this
entry.