PROFITIZE Case Study: How TechCo Recorded the Direct Sale of Finished Goods for Cash

Introduction:

TechCo, the company that manufactures electronic gadgets, sold a batch of finished goods directly to a customer. TechCo delivered the goods and received full payment upon delivery. Since this is a direct sale, TechCo also had to collect Value Added Tax (VAT) from the buyer.

The Situation:

TechCo sold 200 units of finished goods directly to a customer. Each unit was sold for $150. The total sale amount before VAT was $30,000. Since the sale is subject to a 10% VAT, the customer had to pay an additional $3,000 in VAT, bringing the total amount paid by the customer to $33,000.

The Decision:

• Number of units sold: 200

• Price per unit: $150

• Total sales (before VAT): $30,000

• VAT (10%): $3,000

• Total amount paid by the customer: $33,000

  
  

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:

1. When the sale is completed, and payment is received (including VAT):

   • Debit: Cash/Bank for the total amount received from the customer (including VAT).

   • Credit: Sales Revenue for the total sales amount before VAT.

   • Credit: VAT Payable for the VAT collected from the buyer.

     
     

Can You Figure Out the Journal Entries?

Based on the information provided:

1. When TechCo receives the full payment upon delivery (including VAT):

   • Debit: Cash/Bank for $33,000 (total amount received from the customer)

   • Credit: Sales Revenue for $30,000 (total sales amount before VAT)

   • Credit: VAT Payable for $3,000 (VAT collected from the customer)

     
     

Explanation:

• Cash/Bank (Debit): Increases by the total amount received from the customer, including VAT.

• Sales Revenue (Credit): Reflects the revenue earned from the sale of the finished goods.

• VAT Payable (Credit): Represents the VAT collected from the customer, which TechCo must remit to the tax authorities.

  
  

This case study illustrates how TechCo manages its direct sales, records the revenue, and accounts for the VAT collected from the customer, ensuring all aspects of the transaction are accurately reflected in its 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.