Accounting for Taxes

Goods and Services Tax (GST)Goods and Services Tax (GST)

• A federal sales tax on most goods and services A federal sales tax on most goods and services provided in Canadaprovided in Canada

• A business, called a A business, called a registrantregistrant, must register for , must register for GST if it:GST if it:– provides taxable goods or servicesprovides taxable goods or services– has revenues of more then $30,000 in any yearhas revenues of more then $30,000 in any year

• Although registrants pay GST themselves, they Although registrants pay GST themselves, they can claim an can claim an input tax creditinput tax credit (ITC) against the (ITC) against the GST they collect from customersGST they collect from customers

• GST is remitted to the Receiver GeneralGST is remitted to the Receiver General

GST Categories of Goods and GST Categories of Goods and Services:Services:

• Taxable suppliesTaxable supplies, where a rate of 7% is , where a rate of 7% is applied, such as building materials, applied, such as building materials, convenience foods, and clothingconvenience foods, and clothing

• Zero-rated suppliesZero-rated supplies,, subject to GST at 0%, subject to GST at 0%, such as basic groceries and prescription such as basic groceries and prescription drugsdrugs

• Exempt suppliesExempt supplies, not subject to GST, such , not subject to GST, such as education, health-care, and financial as education, health-care, and financial servicesservices

Provincial Sales Tax (PST)Provincial Sales Tax (PST)

• Charged on Charged on retail salesretail sales of certain goods and of certain goods and services and applied to the selling price before GST services and applied to the selling price before GST (except in Quebec and PEI)(except in Quebec and PEI)

• Companies that apply for PST exemption numbers Companies that apply for PST exemption numbers are not charged PST on goods purchased for resaleare not charged PST on goods purchased for resale

• Taxes are remitted to the provincial Minister of Taxes are remitted to the provincial Minister of Finance or TreasurerFinance or Treasurer

• In Quebec and PEI, the PST is cascaded (i.e. In Quebec and PEI, the PST is cascaded (i.e. applied to the total of the applied to the total of the selling price plus GSTselling price plus GST) )

• PST rates vary by province and may not be applied PST rates vary by province and may not be applied at the same rate to all taxable goods and servicesat the same rate to all taxable goods and services

• Certain goods are exempt, such as personal Certain goods are exempt, such as personal services, children’s clothing, and booksservices, children’s clothing, and books

Harmonized Sales Tax (HST)Harmonized Sales Tax (HST)

• In Newfoundland, Labrador, Nova Scotia, and In Newfoundland, Labrador, Nova Scotia, and New Brunswick, GST and PST have been New Brunswick, GST and PST have been combined into the combined into the Harmonized Sales Tax (HST)Harmonized Sales Tax (HST)

• HST is a combined rate of 15% on the selling HST is a combined rate of 15% on the selling priceprice

• HST returns are submitted quarterly or monthly to HST returns are submitted quarterly or monthly to the federal government, which then gives the the federal government, which then gives the provinces their portionsprovinces their portions

• Sales taxes collected by a business is Sales taxes collected by a business is not a not a source of revenuesource of revenue for the company for the company

• Sales tax is collected on behalf of the federal Sales tax is collected on behalf of the federal and provincial governments and provincial governments

• Sales tax collected is a Sales tax collected is a current liabilitycurrent liability to the to the company until remitted to the government at company until remitted to the government at regular intervalsregular intervals

Sales Taxes Collected on ReceiptsSales Taxes Collected on Receipts

Tax on ServicesTax on Services

Entry made to record the billing of a client for $500 of Entry made to record the billing of a client for $500 of services provided. In Ontario, legal services are exempt services provided. In Ontario, legal services are exempt from PST, so only 7% GST is charged. Note revenue is from PST, so only 7% GST is charged. Note revenue is recorded at $500, not $535. GST is recorded as a recorded at $500, not $535. GST is recorded as a current liability.current liability.

J1Date Account Title and Explanation Ref Debit Credit

May 28 Accounts Receivable 535.00Legal Fees Earned 500.00GST Payable ($500 x 7%) 35.00

To record revenue earned on legal fees.

General Journal

Cleaning services provided by a company in Cleaning services provided by a company in Saskatchewan for cash. These services are subject to Saskatchewan for cash. These services are subject to both PST (6%) and GST (7%). Both the PST and GST both PST (6%) and GST (7%). Both the PST and GST are recorded as current liabilities.are recorded as current liabilities.

J1Date Account Title and Explanation Ref Debit CreditJul 24 Cash 282.50

Cleaning Services Revenue 250.00PST Payable ($250 x 6%) 15.00GST Payable ($250 x 7%) 17.50

To record revenue earned on cleaning services.

General Journal


Cleaning services provided for cash in New Cleaning services provided for cash in New Brunswick, where the HST is 15%. Note that the Brunswick, where the HST is 15%. Note that the HST is recorded as a current liability.HST is recorded as a current liability.

J1Date Account Title and Explanation Ref Debit CreditJul 24 Cash 287.50

Cleaning Services Revenue 250.00HST Payable ($250 x 15%) 37.50

To record revenue earned on cleaning services.

General Journal


Tax on Goods – SalesTax on Goods – Sales

Sale of $1,000 of office furniture, on credit, in Ontario (PST 8%, Sale of $1,000 of office furniture, on credit, in Ontario (PST 8%, GST 7%). The company uses the perpetual inventory system GST 7%). The company uses the perpetual inventory system and the cost of the goods is $800. Under the periodic inventory and the cost of the goods is $800. Under the periodic inventory system the second entry would not be recorded.system the second entry would not be recorded.


May 20 Accounts Receivable 1,150.00Sales 1,000.00GST Payable ($1,000 x 7%) 70.00PST Payable ($1,000 x 8%) 80.00

To record sale of office furniture on account.

20 Cost of Goods Sold 800.00Merchandise Inventory 800.00

To record cost of merchandise sold.

General Journal

Tax on Goods – ReturnsTax on Goods – Returns

A $300 sales return and allowance granted on May 25 for returned A $300 sales return and allowance granted on May 25 for returned merchandise on the previous furniture sale. GST and PST payable merchandise on the previous furniture sale. GST and PST payable accounts are debited to indicate the return of a previously collected accounts are debited to indicate the return of a previously collected sales tax. Under the periodic inventory system, the second entry sales tax. Under the periodic inventory system, the second entry would not be recorded.would not be recorded.


May 25 Sales Returns and Allowances 300.00GST Payable ($300 x 7%) 21.00PST Payable ($300 x 8%) 24.00

Accounts Receivable 345.00To record return of goods

25 Merchandise Inventory 240.00Cost of Goods Sold 240.00

To record cost of merchandise returned.

General Journal

Sales Taxes Paid on DisbursementsSales Taxes Paid on Disbursements

Purchase of Merchandise for ResalePurchase of Merchandise for Resale• PST is a single-stage tax PST is a single-stage tax collected from final collected from final

consumersconsumers of taxable goods and services of taxable goods and services• Businesses with a registration number purchase Businesses with a registration number purchase

merchandise for resale merchandise for resale exemptexempt of PST of PST• GST charged on the purchase of merchandise for GST charged on the purchase of merchandise for

resale is offset against any GST collected; GST paid resale is offset against any GST collected; GST paid is consequently is consequently notnot part of the inventory cost of part of the inventory cost of merchandise purchasedmerchandise purchased

• The GST paid on purchases is debited to an The GST paid on purchases is debited to an account called GST Recoverable and is called an account called GST Recoverable and is called an input tax creditinput tax credit

PurchasesPurchases

Entry to record the purchase of goods for resale at a price of Entry to record the purchase of goods for resale at a price of $4,000, on account, using a perpetual inventory system. $4,000, on account, using a perpetual inventory system. The GST is recorded as a receivable using the account GST The GST is recorded as a receivable using the account GST Recoverable. Under the periodic inventory system, the Recoverable. Under the periodic inventory system, the $4,000 debit would be to Purchases.$4,000 debit would be to Purchases.

J1Date Account Title and Explanation Ref Debit CreditMay 4 Merchandise Inventory 4,000.00

GST Recoverable ($4,000 x 7%) 280.00Accounts Payable 4,280.00

To record goods purchased on account.

General Journal

Purchase Returns and AllowancesPurchase Returns and Allowances

A $300 return of merchandise on May 8. Note that the GST A $300 return of merchandise on May 8. Note that the GST Recoverable account is credited instead of the PST Payable Recoverable account is credited instead of the PST Payable account because this is a return of previously recorded GST. account because this is a return of previously recorded GST. Under the periodic system, the credit of $300 would have Under the periodic system, the credit of $300 would have been recorded to the Purchase Returns and Allowances been recorded to the Purchase Returns and Allowances account.account.

Date Account Title and Explanation Ref Debit CreditMay 8 Accounts Payable 321.00

GST Recoverable ($300 x 7%) 21.00Merchandise Inventory 300.00

To record the return of goods.

Operating ExpensesOperating Expenses

Purchase of Goods for UsePurchase of Goods for Use• When taxable goods and services are used in the When taxable goods and services are used in the

operation of a business, the PST forms part of the operation of a business, the PST forms part of the asset or expense that is being acquiredasset or expense that is being acquired

• GST charged on the purchase of goods for use in a GST charged on the purchase of goods for use in a business is recoverable and can be offset as an business is recoverable and can be offset as an input tax credit against GST collectedinput tax credit against GST collected


This entry is for a purchase of office supplies for $200 cash This entry is for a purchase of office supplies for $200 cash in Ontario (PST 8%, GST 7%). The cost of the supplies in Ontario (PST 8%, GST 7%). The cost of the supplies includes both the supplies and the PST. Because GST is includes both the supplies and the PST. Because GST is recoverable, it does not form part of the asset cost but is recoverable, it does not form part of the asset cost but is debited to the GST Recoverable account.debited to the GST Recoverable account.

Date Account Title and Explanation Ref Debit CreditMay 18 Office Supplies ($200 + $16 PST) 216.00

GST Recoverable ($200 x 7%) 14.00Cash 230.00

To record purchase of office supplies.

The same purchase recorded in Prince Edward Island (GST The same purchase recorded in Prince Edward Island (GST 7%, PST charged on GST at 10%). Note that the provincial 7%, PST charged on GST at 10%). Note that the provincial sales tax base includes both the cost of the item and the sales tax base includes both the cost of the item and the GST. Hence, PST is determined by multiplying 10% by $214 GST. Hence, PST is determined by multiplying 10% by $214 ($200 + GST of $14). Because GST is recoverable it does ($200 + GST of $14). Because GST is recoverable it does not form part of the asset cost.not form part of the asset cost.

Date Account Title and Explanation Ref Debit CreditMay 18 Office Supplies ($200 + $21.40 PST) 221.40

GST Recoverable ($200 x 7%) 14.00Cash 235.40



HST is treated the same as GST. HST is recoverable HST is treated the same as GST. HST is recoverable and does not form part of the cost of the item and does not form part of the cost of the item purchased. In Newfoundland and Labrador the HST purchased. In Newfoundland and Labrador the HST would be debited to a HST Recoverable account.would be debited to a HST Recoverable account.

Date Account Title and Explanation Ref Debit CreditMay 18 Office Supplies 200.00

HST Recoverable ($200 x 15%) 30.00Cash 230.00



Property, Plant, and EquipmentProperty, Plant, and Equipment

PST and GST applies to all purchases of property, plant, PST and GST applies to all purchases of property, plant, and equipment. All GST (and HST) paid is recoverable and and equipment. All GST (and HST) paid is recoverable and not part of the cost of the asset. The PST is part of the cost not part of the cost of the asset. The PST is part of the cost of the asset. This entry is for the purchase of office of the asset. This entry is for the purchase of office equipment, on account, for $1,000 in Ontario (PST 8%, equipment, on account, for $1,000 in Ontario (PST 8%, GST 7%).GST 7%).

Date Account Title and Explanation Ref Debit CreditMay 20 Office Furniture ($1,000 + $80 PST) 1,080.00


To record purchase of office furniture.

The same purchase of office equipment, on account, for The same purchase of office equipment, on account, for $1,000 in Prince Edward Island, where GST is 7% and PST $1,000 in Prince Edward Island, where GST is 7% and PST is charged on GST at 10%. Note that PST on $1,070 ($1,000 is charged on GST at 10%. Note that PST on $1,070 ($1,000 + $70 GST).+ $70 GST).

Date Account Title and Explanation Ref Debit CreditMay 20 Office Furniture ($1,000 + $$107 PST) 1,107.00




The same purchase of office equipment, on account, for The same purchase of office equipment, on account, for $1,000 in Nova Scotia, where HST is 15%. HST is fully $1,000 in Nova Scotia, where HST is 15%. HST is fully recoverable and therefore does not form part of the cost of recoverable and therefore does not form part of the cost of that item purchased.that item purchased.

Date Account Title and Explanation Ref Debit CreditMay 20 Office Furniture ($1,000) 1,107.00

HST Recoverable ($1,000 x 15%) 150.00Accounts Payable 1,150.00



Remittance Of Sales TaxesRemittance Of Sales Taxes

• Businesses collect taxes on behalf of the Businesses collect taxes on behalf of the government when the sale occurs and government when the sale occurs and periodically remit them to the appropriate periodically remit them to the appropriate government agencygovernment agency

• GST and HST remittances are reduced by GST and HST remittances are reduced by claiming input tax creditsclaiming input tax credits

GST/HSTGST/HST

When remitting GST (or HST), the amount of GST payable is When remitting GST (or HST), the amount of GST payable is reduced by any amount in the GST Recoverable account. reduced by any amount in the GST Recoverable account. The GST owing is credited to cash. GST (HST) is remitted at The GST owing is credited to cash. GST (HST) is remitted at specific dates, depending on the volume of sales. If GST specific dates, depending on the volume of sales. If GST recoverable exceeds GST payable a refund is receivable and recoverable exceeds GST payable a refund is receivable and a debit to cash would be recorded.a debit to cash would be recorded.

Date Account Title and Explanation Ref Debit CreditJun 30 GST Payable 6,250.00

GST Recoverable 2,500.00Cash 3,750.00

To record remittance to CCRA for GST

PSTPST

Remittance of PST to the Treasurer or Minister of Finance of Remittance of PST to the Treasurer or Minister of Finance of the applicable province or territory is for the balance in the the applicable province or territory is for the balance in the PST Payable account.PST Payable account.

Date Account Title and Explanation Ref Debit CreditJun 30 PST Payable 7,400.00

Cash 7,400.00To record remittance to CCRA for GST

CONCLUSIONCONCLUSION

• Sales tax law is intricate and has added Sales tax law is intricate and has added complexity to the accounting of transactions complexity to the accounting of transactions which flow through today’s businesseswhich flow through today’s businesses

• Before recording sales tax transactions it is Before recording sales tax transactions it is important to understand all of the relevant sales important to understand all of the relevant sales tax regulationstax regulations

• Check the federal and provincial laws in your Check the federal and provincial laws in your jurisdiction.jurisdiction.

COPYRIGHTCOPYRIGHT

Copyright © 2004 John Wiley & Sons Canada, Ltd. All rights reserved. Copyright © 2004 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.these programs or from the use of the information contained herein.

Accounting for Taxes

Documents

Transcript of Accounting for Taxes