Introduction:
TechCo, a company that manufactures electronic gadgets, directly delivered finished goods to a customer. The customer made a partial payment to TechCo in advance. TechCo agreed to provide a trade credit to the customer, allowing the customer to pay TechCo 60 days after the delivery of the ginished goods. As part of the sale, TechCo also collected VAT on the portion of the payment received from the customer.
The Situation:
TechCo sold 500 units of finished goods to a customer. Each unit was sold for $100. The total sales amount before VAT was $50,000. Since the sale was subject to a 10% VAT, the total VAT on the sale was $5,000, making the total amount due $55,000.
The customer made a partial advance payment of $20,000 (including VAT), meaning the pre-VAT portion was $18,181.82, and the VAT was $1,818.18. The remaining balance of $35,000 was extended as trade credit, meaning the customer has agreed to pay this amount later after 60 days.
Case Facts:
Number of units sold: 500
Price per unit: $100
Total sales (before VAT): $50,000
Total VAT (10%): $5,000
Total amount due from the customer: $55,000
Advance payment from customer (including VAT): $20,000
Remaining balance offered to customer as trade credit: $35,000
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:
When the advance payment is received by TechCo:
Debit: Cash/Bank for the advance payment amount (including VAT).
Credit: Deferred Revenue for the pre-tax portion of the advance payment.
Credit: VAT Payable for the VAT portion of the advance payment.
When the goods are delivered and the trade credit is recorded:
Debit: Accounts Receivable for the remaining balance owed by the customer (including VAT).
Debit: Deferred Revenue to recognize the revenue for the pre-tax portion of the advance payment.
Credit: Sales Revenue for the total sales amount (excluding VAT).
Credit: VAT Payable for the remaining VAT collected (or to be collected) from the customer.
Can You Figure Out the IFRS Journal Entries?
Based on the information provided:
When the advance payment is received:
Debit: Cash/Bank for $20,000 (advance payment received including VAT)
Credit: Deferred Revenue for $18,181.82 (pre-VAT portion of the advance payment)
Credit: VAT Payable for $1,818.18 (VAT on the advance payment)
When TechCo delivers the goods and records the trade credit:
Debit: Accounts Receivable for $35,000 (remaining balance including VAT)
Debit: Deferred Revenue for $18,181.82 (to recognize the revenue from the advance payment)
Credit: Sales Revenue for $50,000 (total sales amount excluding VAT)
Credit: VAT Payable for $3,181.82 (remaining VAT on the sale)
Explanation:
Cash/Bank (Debit): Increases as TechCo receives the advance payment from the customer.
Deferred Revenue (Credit/Debit): Initially recorded when the advance payment is received and then reduced when the goods are delivered and revenue is recognized.
Accounts Receivable (Debit): Represents the amount that the customer still owes to TechCo, recorded when the goods are delivered.
Sales Revenue (Credit): Represents 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 government.
This case study shows how TechCo recorded the sale of finished goods involving advance payments, trade credit, delivery, and the collection of VAT. The journal entries ensure that all aspects of the transaction 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.
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