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 #rm 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 #nancial statement purposes, the Creditable Input Tax is presented as a speci#c line item on the Balance Sheet aer Prepaid Expenses.

• e Deferred Input Tax is presented as a separate line item aer 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 #led and paid on or before the 20th day of the month following the taxable month for the #rst two months of the quarter.

• e quarterly VAT return (BIR Form 2550Q) is to be #led 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:

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

Transactions where the VAT is Recorded:

1. Purchase of supplies and tangible #xed 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.

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

Multiplied by: VAT percentage 0.12

Input/Output Tax P xx

Purchase/Selling Price (with VAT) P xxx

Divide by: 9.33333

Input/Output Tax P xx

5. Partial or full payment of account arising from purchase of services or supplies/#xed 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):

2. Return of defective supplies:

3. Purchase of tangible !xed assets (equipment or furniture and !xtures):

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

5. Purchase of repair services for cash:

Supplies xxx

Input Tax (12% of Supplies account) xx

Cash/Accounts Payable xxx

Cash/Accounts Payable xxx

Supplies xxx

Input Tax (12% of Supplies account) xx

Equipment/Furniture and Fixtures xxx

Input Tax (12% of the tangible #xed asset) xx

Cash/Accounts Payable xxx

Accounts Payable xxx

Cash xxx

Repairs and Maintenance Expense xxx

Input Tax (12% of the expense account) xx

Cash xxx

6. Purchase of repair services on credit:

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

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

B. Seller’s Books

1. Sale of services for cash:

2. Sale of services on credit:

3. Partial or full collection of account:

Repairs and Maintenance Expense xxx

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

Accounts Payable xxx

Accounts Payable xxx

Input Tax (Amount paid divided by 9.33333) xx

Cash xxx

Deferred Input Tax (amount paid divided by 9.33333 xx

Cash xxx

Output Tax (12% of Service Income account) xx

Service Income xxx

Accounts Receivable xxx

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

Service Income xxx

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 aer this entry.