How to Account for Inventories Inclusive of VAT

The purchase price of inventories is the sum of the cost of the inventory plus other costs and charges billed by the seller. The amount to be recorded as inventory purchased should be the cost of the inventory plus all direct costs attributable to to the acquisition of finished goods, materials and services such as import duties, transport and handling costs (which is also called freight in or transportation-in) and non-recoverable taxes.

VAT is included in the price that you pay in purchasing inventory. It is considered as a non-recoverable tax if the business is NOT VAT registered.

Sample Problem 1

Shen Company purchased goods that amounted to P5000 from Dairy Farm in England. The import duties is P50, value added tax is P600, transportation and handling costs is P400, and the commission to broker is P20.

All of the costs and charges are included in the value of the inventory. Thus, the entry to record the purchase under the perpetual inventory system should be:

date Inventory







However, the journal entry changes if the company is a VAT registered entity. A VAT registered entity can use the VAT included in the purchased inventory as a deduction from the tax to be paid to the Agency. Here’s the journal entry if the entity is VAT registered:

date Inventory

Input VAT








Sample Problem 2

Fran Company, a VAT inclusive entity purchased Inventory worth P112,000 inclusive of VAT. Fran was given a 10% trade discount on the purchase. The entry should be:

date Inventory

Input Vat








There are a couple of ways to solve this problem. But first, it should be noted that the Value Added Tax rate in the Philippines is 12%.

First Solution

Compute the total amount paid (inclusive of VAT): 112,000 x .90 = 100,800

Compute for the VAT: 100,800 x 12/112 = 10,800

Compute for the amount to be debited to inventory: 100,800 – 10,800 = 90,000

Second Solution

Compute the cost of inventory without VAT 112,000 – (112,000 x 12/112) = 100,000

Compute for the discounted amount without VAT: 100,000 x .90 = 90,000

Add the VAT: 90,000 x 1.12 = 100,800