PROFITIZE Case Study: How TechCo Recorded Direct Sale of Finished Goods on Credit

Introduction:

TechCo, a company that manufactures electronic gadgets, delivered finished goods to a customer. The customer did not pay for the goods upfront or upon delivery. Instead, TechCo extended a trade credit, allowing the customer to pay later. The sale was also subject to VAT.

The Situation:

TechCo delivered 400 units of finished goods to a customer. Each unit was sold for $200. The total sales amount before VAT was $80,000. Since the sale was subject to a 10% VAT, the total VAT on the sale was $8,000, making the total amount due $88,000.

However, TechCo did not receive any payment upfront or upon delivery. Instead, the entire amount was offered as trade credit, meaning the customer agreed to pay TechCo this amount later.

Case Facts:

• Number of units sold: 400

• Price per unit: $200

• Total sales (before VAT): $80,000

• VAT (10%): $8,000

• Total amount due from the customer: $88,000

• Payment terms: Full amount due later under trade credit.

  
  

IFRS Journal Entries

Now, let’s think about how TechCo would record this transaction in their accounting books according to IFRS (International Financial Reporting Standards). TechCo needs to make the following journal entries to reflect the sale and the fact that payment has not yet been received.

When the finished goods are sold and delivered to the customer:

Debit: Accounts Receivable for the total amount due from the customer (including VAT).

Credit: Sales Revenue for the sale price of the finished goods (before VAT).

Credit: VAT Payable for the VAT collected (or to be collected) from the customer.

Can You Figure Out the IFRS Journal Entries?

Based on the information provided:

When TechCo sells the finished goods and offers trade credit:

Debit: Accounts Receivable for $88,000 (total amount due from the customer, including VAT)

Credit: Sales Revenue for $80,000 (sale price of the finished goods excluding VAT)

Credit: VAT Payable for $8,000 (VAT amount)

Explanation:

• Accounts Receivable (Debit): Reflects the amount that the customer owes TechCo, recorded when the finished goods are delivered.

• Sales Revenue (Credit): Represents the revenue earned from the sale of the finished goods, even though the payment has not yet been received from the customer.

• VAT Payable (Credit): Represents the VAT that TechCo must pay to the government, even though the payment has not yet been received from the customer.

  
  

This case study shows how TechCo recorded the sale of finished goods on trade credit terms and how VAT is accounted for in the transaction. The journal entries ensure that the sale and the future receivable are accurately recorded in TechCo’s financial records. ​

Disclaimer: This case study is designed to enhance digital financial literacy and business management skills among students, to help them apply these concepts in real-world scenarios to boost their earnings, employability and entrepreneurial potential. The case was edited by Razi Amin, a Harvard MBA with 30+ years of leadership and advisory experiences at major international banks in New York, London, Hong Kong and Washington, DC. Razi is also a member of Harvard Alumni for Global Women's Empowerment. While AI technology was used for prompt-engineering to generate case content, every case has been rigorously reviewed and edited to ensure accuracy, clarity, and educational effectiveness. Reproduction of this case material is prohibited without permission from ASPEN Capital Solutions LLC.