Goods and Services Tax (GST)

Goods and services tax (GST)

Contents

Key to resources

Introduction

Methods for recording the GST

This learning guide is based on the following resource:
Textbook
Duncan, A (2006) Introductory Accounting, National Core Accounting Publications, Bondi, NSW.

Key to resources

Resource / Textbook
1 / Chapter 4, section 4.6
2 / Chapter 4, section 4.7
3 / Chapter 4, self-testing exercise 1
4 / Chapter 4, end of chapter exercises nos. 11 and 17 (a)

Introduction

/ Go to Resource 1

From July 1, 2000 Goods and Services Tax legislation required businesses to collect 10% tax on all goods and services provided by the business. If the business pays GST when goods or services are purchased the amount is offset against the amount collected and the net figure is then paid regularly to the Tax Office by the business. Because we collect on behalf of someone else (the Tax Office) and the money is not ours, we record it in a liability account. It is a debt we must repay.

Methods for recording the GST

There are many ways of recording the GST in books of accounts. For simplicity we will use only one account for GST. When GST is collected from or charged to our customers we record it in the GST account on the credit side because it is an increase to a liability. If the business purchases goods or services then the GST account is reduced by the amount we paid. This will be shown on the debit side of the GST account because the amount we have to pay to the Tax Office is decreased. Any GST component of discounts given or allowed will be handled by the Accountant at the end of each month.

Most source documents show GST separately. If you receive an invoice that shows the total price—ie tax inclusive—the GST component can be calculated by dividing the total amount by 11.

The legislation requires that all source documents show the seller’s Australian Business Number (ABN), the words ‘Tax Invoice’ on invoices, ‘Tax Adjustment’ on tax adjustment notes and indicate how the GST is to be shown. In the learning materials we will assume that all requirements of the legislation have been followed.

In Accounting for GST, a single GST Clearing account as a liability account will be used. This is appropriate, as in most cases the net effect of GST transactions will mean the business has to pay to the Tax Office on its business activity statement. The GST Clearing account will cover both GST collected (owing to the Tax Office) and GST paid (recoverable from the Tax Office).

If a cash receipt transaction has a GST component, that GST component will be a liability in that it will have to be paid to the Tax Office.

Example

General Journal entry for a cash sale that includes GST:

Debit / Bank (asset increase) / 550
Credit / Sales (income increase) / 500
Credit / GST clearing (liability increase) / 50
Cash sale $550 including GST

If a payment transaction has a GST component, that GST component will be an asset but accounted for as a reduction of a liability, as the amount will be recoverable from the Tax Office.

Example

General Journal entry for an Expense payment that includes GST:

Debit / Insurance (expense increase) / 350
Debit / GST clearing (liability decrease) / 35
Credit / Bank (asset decrease) / 385
Insurance payment $385 including GST
/ Now go to Resource 2
/ Now go to Resource 3
/ Now go to Resource 4

Goods and services tax (GST)1