You pay Goods and Services Tax [GST] on goods you purchase, and charge your customers GST on goods you sell. You must remit to the government the amount of GST you charge your customers, less any GST you pay on business-related purchases that qualifies as an input tax credit. This post provides basic guideline on how to the Goods and Services Tax [GST].
Preparing for Tax Accounting
Before you set up your accounting system, you should take steps to prepare for tax accounting. If you have not already done so, you should consult an accounting professional for the latest tax information, and for advice on the impact the taxes will have on your particular business.
Setting Up General Ledger Accounts
You would need to set up accounts to keep track of the GST. In the General Ledger, create the following current liability accounts for GST:
- GST Charged On Sales
- GST Paid On Purchases
- GST Adjustments [optional]
- GST Payroll Deductions [optional]
- GST Owing [Refund]
By grouping all the GST accounts together you can easily see how much you owe the government, or how much the government owes you.
GST Paid on Business-related Purchases
The GST that you pay on business-related purchases is not an expense or a cost of inventory if it qualifies as an input tax credit. You account for it separately and claim it back from the government.
If you purchase inventory for $100, and pay GST at 10 percent, the journal entry to record the purchase might look like this:
[Debit]. GST Paid on Purchases = $10.00
[Debit]. Inventory = $100.00
[Credit]. Cash = $110.00
GST Charged On Sales
When you sell goods and services to customers, you must account for the GST too. The GST you charge your customers must appear on invoices. The GST can be charged either separately or included in the selling price. If GST is included in the selling price, it must be clearly indicated which items are taxed.
Note: Not all items are subject to the Goods and Services Tax. You should check the regulations to see which goods are tax-exempt or zero-rated.
When you sell item A for cash at $200.00 with GST at 10%, the journal entry to record the sale would be:
[Debit] Cash = $226.00
[Credit]. Revenue = $200.00
[Credit]. GST Charged on Sales = $26.00
[Debit] Cost Of Goods Sold = $226.00
[Credit]. Inventory – Product A = $100.00
GST Payroll Deductions
If your employees receive benefits that are subject to the GST, you should set up a GST Payroll Deduction account in the General Ledger. GST for benefits provided to employees can be charged and reported annually when you print payroll slips, or you may choose to deduct the GST from each paycheck.
Example: If an employee has a taxable benefit of $120, with GST at 10%. When a paycheck is produced, $12.00 is deducted from the employee’s paycheck and recorded as an increase in the GST Payroll Deduction account.
Adjustments on GST
On occasion, you may have to record GST for transactions that are not sales or purchases. Do not use the GST Charged On Sales or GST Paid On Purchases accounts to make these adjustments. Instead, make journal entries using the GST Adjustments and Adjustments accounts. Use the GST Adjustments account to record GST you owe the government for transactions that are not sales.
- The GST portion of a bad debt that has been recovered.
- The GST portion of a bad debt that is written off.
- The GST rebate a builder pays or credits for new housing.
Clearing the GST Accounts
When you remit the GST you owe [or receive your refund], post the check against the GST accounts to prepare them for the next reporting period.
Example: Using the same examples we use on the previous section, the journal entry to record the remittance and clear the tax account would appear as follows:
[Debit]. GST Charged on Sales = $26.00
[Debit]. GST Payroll Deductions = $12.00
[Credit]. GST Paid on Purchases = $10.00
[Credit]. Cash = $28.00
Once the journal entry made, all the tax account will be washed and clear to zero balance.