Vat and Completion of Acc Cycle For Merchandising
Vat and Completion of Acc Cycle For Merchandising
Vat and Completion of Acc Cycle For Merchandising
State imposes a tax on the consumer and requires the business to collect the tax from the buyer. The seller acts
as a collection agent for the state and remits the taxes collected from customers to BIR. In the Philippines a 12% VAT is
imposed on the gross selling price of goods and services by a business enterprise that is registered under the value
added tax system. The Output VAT account is used to record the 12% VAT imposed on the sale of goods and services.
While the 12% VAT that is paid by a VAT registered enterprise is known as Input VAT. The Input VAT account is deducted
from Output VAT in determining the tax liability.
Illustrative Problem:
Jan 1
Seller Company sold merchandise to Buyer Enterprise on account terms 5/10, n/30 for P11,200 inclusive of 12%
VAT.
Customer was given a credit of P224 which is inclusive of VAT for the return of defective merchandise.
Seller Company
Jan 1
Accounts Receivable
Sales
Output VAT
(12,000/1.12 x .12)
Sales Return and Allowance
Output VAT
Accounts Receivable
(224/1.12 x .12)
Buyer Enterprise
11,200
Jan 1
10,000
1,200
200
24
5
224
11 Cash
Sales Discounts
Output VAT
Accounts Receivable
10,427
490
59
Balance of AR (11,200-224)
Less: Sales Discounts:
Sales
P10,000
Sales Return and Allowances
200
Net Sales
P 9,800
Discount Rate
x
5%
Less: Adjustment to VAT
From Sales Discount (490 x 12%)
Amount collectible from buyer
P10,976
10,976
Purchases
Input VAT
Accounts Payable
10,000
1,200
11,200
Accounts Payable
224
Input VAT
Purchase Return and Allowance
11 Accounts Payable
Input VAT
Purchase Discount
Cash
24
10,976
59
490
10,427
(490)
(59)
P10,427
Bad Debts
Whenever merchandise is sold and services are rendered on credit, there is always the risk that such credit may
not be collected. Uncollectible accounts known as Bad Debts Expense. There are two methods of accounting for
uncollectible accounts.
1. Direct Write-off Method Accounts Receivable is written off or cancelled. This method is used when the account
is determined to be really not collectible. Death, bankruptcy or disappearance of the debtor may consider as
reasons for uncollectibility of an account.
Journal entry:
Bad Debts Expense
xxxx
Accounts Receivable
xxxx
If the account previously written off is later recovered and collected in the same period the entries will be:
Accounts Receivable
xxxx
Bad Debts Expense
xxxx
(To record reinstatement of AR previously written off)
Cash
xxxx
Accounts Receivable
xxxx
2. Allowance Method the estimated amount of uncollectible accounts is deducted from Accounts Receivable and
charged to Bad Debts Expense. However, the Accounts Receivable account is not credited directly at this time
because the specific account that is uncollectible remains unknown. The Accounts Receivable account is reduced
by a contra asset account called Allowance for Bad Debts. This is deducted to Accounts Receivable in order to
present Account Receivable in the balance sheet at Net Realizable Value.
Journal entry:
Bad Debts Expense
xxxx
Allowance for Bad Debts
xxxx
If the accounts receivable becomes worthless because of death, bankruptcy etc. and management decided to
write off the account from the books, the entry will be:
Allowance for Bad Debts
xxxx
Accounts Receivable
xxxx
In case the account previously written off is recovered, the entries to record the reinstatement and the collection
will be:
Accounts Receivable
xxxx
Allowance for Bad Debts
xxxx
(To record reinstatement of AR previously written off)
Cash
xxxx
Accounts Receivable
xxxx
xxxx
xxxx
xxxx
Ex. The following account balances before adjustments were taken from the general ledger of Dixie Trading:
Accounts Receivable
Allowance for Bad Debts
Sales
Sales Return and Allowances
Sales Discounts
P50,000
P
1,000
204,600
2,500
2,100
Assume that the estimate for bad debts is 3% of Accounts Receivable. Bad Debts Expense is:
Accounts Receivable
Rate
Required Allowance
Less: Credit balance in Allowance for Bad Debts
Bad Debts Expense
The adjusting entry will be:
Bad Debts Expense
Allowance for Bad Debts
P 50,000
x
3%
P 1,500
1,000
P
500
500
500
2. Aging of Accounts Receivable Method an aging schedule is prepared by classifying each receivable by its due
date. The number of days an account is past due is determined from the due date to the date of aging schedule is
prepared.
Ex. Assume that Dixie Trading is preparing an aging schedule as of December 31, 2011. Lets further assume that
Allowance for Bad Debts has a credit balance of P4,000 before any adjustment.
Customer
Balance
Nardo Enterprise
P 40,000
Berting Trading
60,000
Lando Store
20,000
Carding Carinderia
50,000
30,000
T O TAL
P 200,000
Not yet
due
1-30 days
31-60
days
61-90
days
91-180
days
181365
days
Over
365
P 40,000
P 60,000
P 20,000
P 50,000
P 30,000
P 60,000
Age Interval
Balance
P 60,000
30,000
20,000
50,000
40,000
-
TOTAL
P 200,000
P 30,000
P 20,000
P 50,000
P 40,000
P 10,500
4,000
P 6,500
6,500
3. Percentage of Sales Method this method estimates Bad Debts Expense by using a percentage of net credit
sales. The percentage used is determined by analyzing the percentage of losses on net sales in past accounting
periods. Any balance in the Allowance for Bad Debts account from prior period is not deducted or added in
determining the amount of Bad Debts.
Ex. The following account balances before adjustments were taken from the general ledger of Dixie Trading:
Accounts Receivable
Allowance for Bad Debts
Sales
Sales Return and Allowances
Sales Discounts
P50,000
P
1,000
204,600
2,500
2,100
Assume that the estimate for bad debts is 1/2% of Net Sales. Bad Debts Expense is:
Sales
Less: Sales Return and Allowances
Sales Discounts
Net Sales
Rate
Bad Debts Expense
Journal Entry:
P 204,600
P 2,500
P 2,100
4,600
P 200,000
x
%
P 1,000
1,000
1,000
P 93,000
52,500
160,000
19,200
4,300
100,000
P 18,000
56,300
260,000
120,000
602,750
1,200
18,000
100,000
2,380
Purchase Discounts
Freight-in
Salaries Expense Selling
Salaries Expense Office
Freight-out
Rent Expense Selling
Rent Expense Office
Utilities Expense Selling
Utilities Expense Office
3,500
3,000
164,080
41,020
1,080
23,040
5,760
29,400
7,350
Totals
P 942,930
Adjustment Data:
a.
b.
c.
d.
e.
Insurance expired is P6,400. The fire insurance was taken for the Store Equipment.
The Store Equipment was acquired January 1,2009 with no salvage value
Accrued Salaries: Selling P1,100, Office P500
A physical inventory shows P2,100 of Store Supplies unused as of December 31,2011
Merchandise Inventory at December 31, 2011 is P78,000
Mon Store
Worksheet.xlsx
Preparation of worksheet (click the icon to download)
Preparation of Financial Statements:
Mon Store
Income Statement
For the year ended December 31, 2011
Sales
Sales Returns and Allowances
Sales Discounts
Net Sales
Cost of Goods Sold (see note 1)
Gross Profit
Operating Expenses:
Selling Expenses:
Salaries
Freight-out
Rent
Utilities
Insurance
Depreciation
Store Supplies
Administrative Expense:
Salaries
Rent
Utilities
Net Income
Note 1 Cost of Goods Sold
602,750
19,200
583,550
179,120
404,430
1,200
18,000
165,180
1,080
23,040
29,400
6,400
9,000
2,200
236,300
41,520
5,760
7,350
P
54,630
113,500
P 942,930
P
100,000
3,000
(2,380)
(3,500)
P
160,000
97,120
257,120
P
(78,000)
179,120
_________________________________________________________________________________________________
Mon Store
Statement of Changes in Owners Equity
For the year ended December 31, 2011
Mon Bautista, Capital. 01/01/2011
Add: Net Income
Total
Less: Mon Bautista, Drawing
Mon Bautista, Capital, 12/31/2011
260,000
113,500
373,500
120,000
253,500
Mon Store
Balance Sheet
December 31, 2011
ASSETS
Cash
Accounts Receivable
Merchandise Inventory
Prepaid Insurance
Store Supplies
Store Equipment
Less: Accumulated Depreciation
Total Assets
100,000
27,000
P
93,000
52,500
78,000
12,800
2,100
73,000
311,400
P
P
P
56,300
1,600
57,900
253,500
311,400
Merchandise Inventory
Sales
Purchase Returns and Allowances
Purchase Discounts
Income Summary
78,000
602,750
2,380
3,500
686,630
(To record the ending inventory and to close nominal accounts with credit balances)
Income Summary
Merchandise Inventory
Sales Returns and Allowances
Sales Discounts
Purchases
Freight-in
Salaries Expense Selling
Salaries Expenses Office
Freight-out
Rent Expense Selling
Rent Expense Office
Utilities Expense Selling
Utilities Expense Office
Insurance Expense
Depreciation Expense
Office Supplies Expense
573,130
160,000
1,200
18,000
100,000
3,000
165,180
41,520
1,080
23,040
5,760
29,400
7,350
6,400
9,000
2,200
(To close the beginning inventory and nominal accounts with debit balances)
Income Summary
Mon Bautista, Capital
113,500
113,500
120,000
120,000
93,000
52,500
78,000
12,800
2,100
100,000
P
338,400
27,000
56,300
1,600
253,500
338,400