Struggling with Invoicing Prepaid Service

[John A Brown]

In the solution above there still exists an 650.00 obligation (liability)
to pay the sales tax and 650.00 in the bank account received when the
customer paid. When you pay the sales tax, it reduces the sales tax
liability and also reduces the bank account. Thus the sales tax passed
through you accounting system without affecting your balance sheet equity
or your profit and loss (revenue and expenses). If you treated it as "sales
tax revenue" and "sales tax expense" it would increase both revenue and
expenses. The US forms for sales tax request a revenue figure and then
multiplies the revenue times sales tax percent and you owe the tax
authority the resulting figure. So it is best not to record the sales tax
as revenue as you could conceivably be paying sales tax on sales tax
revenue.

HTH

Kind Regards

On Mon, Oct 12, 2015 at 4:05 PM, David Cousens <davidcousens at bigpond.com>
wrote:

>
> Kevin,
>
> I had a rethink on your problem particularly with regard to the treatment
> of the unearned revenue and conversion to income. As far as I can see your
> HST in Canada appears to be similar to GST in Australia so it should most
> likely appear on your original invoice (You may need to check your local
> tax regulations/laws for detailed requirements. The exact names used for
> the accounts below may also be slightly different in Canada depending on
> local practice by accountants.
>
> I had a look at the treatment of Unearned Revenue in my Financial
> Accounting textbook and I think the following sequence of transactions
> should adequately record the processes you described previously and should
> apply for most jurisdictions with a similar tax structure.
>
> When you issue the invoice for prepayment to the customer:
>
> Asset:Accounts Receivable  Debit  5650
> Liability:HST              Credit  650
> Liability:Unearned Revenue Credit 5000
>
> On receiving payment from the customer:
>
> Asset:Accounts Receivable  Credit 5650
> Asset:Bank                 Debit  5650
>
>
> On completion of some of the work (e.g. 3000 worth):
>
> Liability:Unearned Revenue Debit  3000
> Income:Services            Credit 3000    ( may also be Revenue)
>
>
> I would recommend using sub-accounts of Unearned Revenue and
> Revenue:Service for each individual customer so you can track the work
> remaining value  and the completed value for each customer.
>
> Regards
>
> David Cousens
>
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