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

)
Transactions
1. Purchased
merchandise,
P10,000 VATinclusive, on
terms 2/10
n/30
2. Sold
merchandise,
P18,000 VATinclusive, on
terms 2/10
n/30
3. Returned
merchandise,
P1,000, VATinclusive

Journal Entries
Purchases
Input Tax
Accounts Payable
(P10,000/1.12 = P8,928.57)
(P8,928.57 x 0.12) = P1,071.43)

4.

Sales Returns and Allowances

Output Tax
Accounts Receivable
(P1,000/1.12 = P892.86)
(P892.86 x 0.12 = P107.14)

Sales returns,
P1,000, VATinclusive

5.

Accounts Receivable
Sales
Output Tax
(P18,000/1.12 = P16,071.43)
P16,071.43 x 0.12 = P1,928.57)
Accounts Payable
Purchase Returns and Allowances
Input Tax
(P1,000/1.12 = P892.86)
(P892.86 x 0.12 = P107.14)

8,928.57
1,071.43
10,000.00

18,000.00
16,071.43
1,928.57

1,000.00
892.86
107.14

892.86
107.14
1,000.00

Partial
payment of
P1,500
6. Partial
collection of
P2,000
7. Payment of
account within
discount
period

Accounts Payable
Cash

1,500.00

Cash
Accounts Receivable

2,000.00

Accounts 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

8.

Cash
Sales Discount
Output Tax
Accounts Receivable
(P18,000-1,000-2,000 = P15,000)
(P18,000-1,000) x 0.02 = P340/1.12) =

Collection of
account within
discount
period

1,500.00

2,000.00

160.71
19.29
7,320.00

14,660.00
303.57
36.43
15,000.00

P303.57
(P303.57 x 0.12 = P36.43)
(P15,000-340 = P14,660)

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

VAT Payable
Cash
Remittance to BIR

1,999.20
1,058.40
940.80

940.80

940.80

If the remittance happened at the end of the month, the compound journal entry is as
follows
Output Tax
Input Tax
Cash
Remittance to BIR

1,999.20
1,058.40
940.80

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

1,058.40
940.80
1,999.20