GST accountant questions (was Re: Inventory and GST)

[Derek Atkins]

marthter <marthter at yahoo.ca> writes:

> My question is for any real accountants out there:  If I sell a
> product and collect GST on it (which has to be forwarded to the taxman
> quarterly), it seems that that money (which I am calling GST Income)
> should be increasing both my assets (because it goes in my bank
> account - for a while at least), AND increasing my liabilities
> (because I have to forward it to the taxman quarterly).  How can one
> income item go into two places?  Is there a "right" way to account for
> this?  Perhaps I shouldn't really be calling it income at all?  My
> hunch is that there may be two "right" ways to do it, and either are
> okay as long as you are consistent.

It's not income, it's just a liability.  So it goes from
liability:collected-GST -> asset and then asset ->
liability:collected-GST when you pay it.  It doesn't touch an Income
account (because it isn't income).  With the business tools it
would go from:

        liability:collected-GST -> A/R                  <- invoice posted
        A/R -> Cash                                     <- invoice paid
        Cash -> liability:collected-GST                 <- GST paid to gov't

> Also, when I forward the GST that I've collected to the taxman, should
> I just call that a negative entry in GST income (and decrease to my
> bank account accordingly)?  That thinking doesn't seem to work with
> the notion that the GST I've collected is increasing my liability, and
> then when I forward it to the taxman, that reduces my liability.
> Which thinking is correct?

Well, how you account for it is up to you...  But I would use asset
and liability accounts intead of income and expense accounts when
dealing with taxes.  I would certainly do that when dealing with
"collected taxes"..  Taxes that are paid but never count to anything
are expenses, but taxes you pay that are then applied elsewhere
(reducing your tax liability, for example) is an asset.

> Regards.
> 
> ~Martin
> 
> 
> 
> p.s. An interesting spin on the "what is taxable?" question (hot
> chicken vs cold chicken, etc).  As I understand it, EVERYTHING in
> Canada is taxable, it is just that some things (like cold chicken and
> other groceries) are currently taxed at a 0% rate.  This was glossed
> over by the people who argue that essentials should not be taxed, yet
> it allows the government to raise the rate in the future with a mere
> federal budget announcement, rather than passing a whole new law
> through Parliament to change the definition of what is taxable.

I think it varies everywhere.  The Tax Table infrastructure is
flexible so you can define your own tables in your own juristictions.

-derek

> Bret Busby wrote:
> 
> >On Sun, 22 Jun 2003, George Osvald wrote:
> >
> >
> >>Date: Sun, 22 Jun 2003 22:41:00 +1000
> >>From: George Osvald <mail at okstudio.com.au>
> >>To: gnucash-user at lists.gnucash.org
> >>Subject: Inventory and GST
> >>
> >>Two questions:
> >> How do I set up an Inventory of all products (broken down to parts
> >> if possible)? Do I create a normal account under assets with all
> >> the products and descriptions?
> >>Is quantity pricing possible in GNUcash?
> >>
> >> How to set up GNUcash for Australian GST? I am using cash GST
> >> system and GST is calculated only at the time of the transaction. I
> >> have to report GST paid and received every quarter and then get a
> >> refund or pay. Could I set two GST tax accounts. one for credits
> >> and another one for payments? Then I would check all customers that
> >> GST applies to with GST collected tax account and all the vendors
> >> with GST paid tax account.
> >> I would also need two AR/AP accounts. AR with GST, AR GST Free, AP
> >> with GST and AP GST Free. Maybe another global AR and AP for totals
> >> without taxes.
> >>
> >>
> >
> >
> >>Is this correct or am I overcomplicating it?
> >>
> >>
> >>
> >>
> >
> > It is my understanding of the GST in Australia, that the GST applies
> > to all customers; and that it is the goods/services which are
> > differentiated - whether the chicken is above 20 degrees centigrade
> > (room temperature), making it subject to GST, or, less than room
> > teperature, making it exempt from GST, and, likewise, whether the
> > coffee beans are ground or not, determining whether they are subject
> > to GST, and all that rubbish.
> >
> > The only differentiation as to whether parties (people, businesses,
> > organisations) are subject to GST, applies to whether they are to
> > charge GST (whether the vendor is to charge GST), and, not whether
> > they are to be charged GST (whether the customer gets charged
> > GST). If the party is registered for GST, then the party is
> > entitled, and, required, to charge GST, otherwise the party is not
> > entitled or required to charge GST.
> >
> >You might want to contact the ATO, to clarify all of this.
> >
> > I have previously obtained a ruling from the ATO, relating to the
> > GST applicability to LETS (barter organisations) organisations and
> > transactions. See http://www.busby.net/wallets/GST_Ruling.html , and
> > the part "What is GST? An overview", for some brief information
> > about charging of the GST in Australia.
> >
> > I believe that, in terms of using GnuCash for GST reporting, the
> > best thing to do (apart for programming for the variously
> > continually changing reporting requirements), is to
> > 1) include a field for the organisation using the application, to
> > flag whether the organisation is registered for the GST; if yes,
> > then all services have a GST component, and, the calculations for
> > invoices and reports would then check for 2); and
> > 2) include a field for the (yet to be created module) inventory
> > component, where each inventory item has a flag field; something
> > like "Subject to GST?"; and
> > 3) include a field, dependent on 1), that is the GST rate (depending
> > on the particular state/country, assuming that the GST rate is
> > constant for the country, and not variable, depending on the item).
> >
> > It must be considered, I believe, that GnuCash is (I believe)
> > designed for international use, rather than for the specific
> > accounting requirements of a particular country, and, as such,
> > significant variations could apply for the implementation of tax
> > inclusion. For example, in New Zealand, the GST applies to
> > everything and (I believe), to all businesses. As an example, here
> > in Australia, I am an Amway Distributor (this is NOT advertising or
> > promotional). In Australia, an Amway Distributor may or may not be
> > registered for the GST, so an Amway Distributor may or may not
> > charge GST on the Distributor's component of pricing, and may or may
> > not be paid GST by Amway, on bonuses, depending on whether the
> > Distributor is registered for the GST. If the annual turnover of the
> > Distributor's business, is greater than 50,000AUD, then the
> > Distributor is required to be registered for GST, from memory. If
> > the Distributor's annual turnover is less than the threshold, then
> > the Distributor may be registered for GST, but is not required to
> > register. Apart from that differentiation between the two countries,
> > some product lines in Australia, are subject to GST, and, some are
> > not. So, in Australia, using GnuCash for an Amway Distributorship
> > business, with a GST component in the accounting system, would
> > require two components (apart from the addition of the yet to be
> > created Inventory System); the first being whether the Amway
> > Distributor is registered for the GST, and, the second, being which
> > particular inventory items are subject to the GST. As an example,
> > toilet cleaner is subject to GST, as is laundry detergent and
> > dishwashing detergent and toothpaste, and, pasta sauce, salad
> > dressing, canned tuna (exempt for human food, subject to GST for pet
> > food) are not subject to GST. All lines are subject to GST, in NZ,
> > from my understanding.
> >
> > Oh, and, in Australia, I believe that GST oriented accounting
> > software, also has to include (where a party is registered for the
> > GST), the party's ARBN and/or GST registration number, which are to
> > show on all documents relating to the GST (invoices and GST
> > reporting), from memory. That means a requirement for an extra one
> > or two fields, the second being dependent on GST registration. That
> > may or may not apply in NZ, I do not know.
> >
> > And, as far as I am aware, the GST rate is different in NZ, so the
> > field for the GST rate. would be required.
> >
> > As all business are required to be registered for the GST in NZ,
> > and, due to the reporting requirements, some small businesses
> > (microbusinesses with small turnovers) closed down, and, that
> > included some Amway Distributorships giving up in NZ.
> >
> > However, while all of that applies to the (relatively) simple
> > differences in the sales tax components between NZ and Australia,
> > which both have GST, not all countries have GST - some still have
> > wholesale taxes, which vary in their application between different
> > countries, and, from what I understand, the wholesale and other
> > sales tax rates, vary between different goods and services within
> > the same country, and, from what I understand, from memory, in
> > countries that are federated, like the USA, sales and/or wholesale
> > taxes, apply to goods and services, with both state and federal
> > components, like the monumental botch-up with petrol pricing in
> > Australia, where, I believe, apart from the federal and state taxes
> > levied on petrol, the GST also applies. We were led to believe that
> > the GST would replace all the petrol taxes, when the election was
> > held, that elected the government that imposed the horrendous GST
> > system in Australia, but, that's another story.
> >
> > So, after all of that.... I believe and suggest that, for GnuCash to
> > incorporate tax components like Australian GST components, so it can
> > be used for GST reporting, apart from the need for Inventory System
> > module(s), it needs for local components to be written for each
> > state/country, as applicable, which would require knowledgeable
> > people in each state/country, to write the country-specific modules,
> > as add-ons. I believe that the resultant modules and their output,
> > would need regular updating, and checking, by a tax accountant,
> > and/or the state/country-specific tax office, for legality, if the
> > software is to be used for tax invoices and for tax reporting, as in
> > Australia.
> >
> > Then, the result would be, for example, that a person would instal
> > "GnuCash-generic" (with, when it happens, an incorporated Inventory
> > System... :) ), devoid of sales/wholesales taxes, and, if the party
> > wants to incorporate sales/wholesale taxes into the accounting, then
> > installing an add-on, state/country-specific module, specific to the
> > state/country's particular taxes and reporting requirements, with
> > the add-on module being updated as frequently as required, to keep
> > pace with any changes as they occur. That is partly why accounting
> > software in Australia, has become prohibitively expensive for
> > microbusinesses; the software development people have an ongoing
> > job, trying to keep up with the unstable GST requirements, and are
> > required to continuously change the software.
> >
> > As an example, when commercial accounting software in Australia,
> > finally caught up with the introduction of the GST, from memory,
> > Quick Books Professional was selling for about 300AUD; now it is
> > (only a couple of years later) selling for about 1500AUD. Either it
> > is expensive and very involved, to maintain GST-compliant software
> > in Australia, in an attempt to keep pace with the unstable GST
> > requirements, or, the Australian dollar is going the way of the
> > second-world-war deutschemark, or, both.
> >
> > It all sounds very complicated, and, would (I believe) take much
> > work, on an ongoing basis (to keep up with the continuously changing
> > Australian GST requirements, for example), but, I believe that that
> > is the nature of what would be required.
> >
> > I think, however, that an integrated Inventory System component
> > (devoid of taxes, at this stage; start simple, get it up and
> > running, THEN elaborate), as recently mentioned, would be a good
> > step on the way to enhancement.
> >
> > Disclaimer: I am NOT a tax professional or a qualified accountant,
> > and this is all NOT professional advice - this is all from my
> > understanding of the way things are.
> >
> >
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-- 
       Derek Atkins, SB '93 MIT EE, SM '95 MIT Media Laboratory
       Member, MIT Student Information Processing Board  (SIPB)
       URL: http://web.mit.edu/warlord/    PP-ASEL-IA     N1NWH
       warlord at MIT.EDU                        PGP key available