Ppt ch 05 new

Chapter 4

Sales Taxes

in Canada

Prepared by

Brooke C. W. Barker

Copyright © 2010 by Nelson Education Limited


4-2Chapter 4: Correcting Entries & Sales Taxes in Canada

Chapter Objectives

After completing this chapter, you will be able to:

calculate and record the GST/HST charged on taxable sales of goods and services

calculate and record the GST/HST paid on the purchase of assets and expenses

calculate and record the PST charged on taxable sales of goods and services


4-3Chapter 4: Sales Taxes in Canada

GST

Goods & Services Tax5%

HST

Harmonized Sales Tax13% (combines GST and PST)

Used in Nova Scotia, New Brunswick, and Newfoundland and Labrador

Used in Ontario as of July 1, 2010PST

Provincial Sales TaxRates vary by province


4-4Chapter 4: GST/HST on Sales

GST Payable

A liability account used to keep track of the GST charged to customers on the sales of goods/services

HST Payable

Same as GST Payable above, but used only in those provinces that charge HST.



Recording a sale: Example 1

Cash sales for the week were $1,000 plus HST.

Bank 1130.00

Sales 1000.00

HST Payable 130.00

Cash sales for the week.

1000.00 x 13% = 130.00

The liability HST Payable is used because this money is owing to the federal government.



Recording a sale: Example 2 - Manitoba

Sale on account to ABC Co., terms n/30, $800 plus GST.

A/R ABC Co. 840.00

Sales 800.00

GST Payable 40.00Sale on account, terms n/30.800.00 x 5% = 40.00

The same liability account is used whether the sale is for cash or on account.



Recording a sale: Example 3

Sale on account to LMN Co., terms n/30, $800 plus HST.

A/R ABC Co. 904.00

Sales 800.00

HST Payable 104.00Sale on account, terms n/30.800.00 x 13% = 104.00

The journal entry is the same whether the tax is GST or HST.


4-8Chapter 4: GST/HST on Purchases

GST-ITC

A contra-liability (negative liability) account used to keep track of the GST paid on items used within the business.

This amount is deducted from GST Payable to find the amount to be remitted to the federal government.

HST-ITC

Same as GST-ITC above, but used only in those provinces that charge HST.



Recording a purchase: Example 1

Cash purchase of merchandise, $2,000 plus HST.

Purchases 2000.00

HST-ITC 260.00

Bank 2260.00Cash purchase of mdse.2000.00 x 13% = 260.00

HST-ITC is a contra-liability account, so it is recorded on the debit side of the entry.



Recording a purchase: Example 2 - Saskatchewan

Bought advertising material from EFG Co., terms n/30; $250.00 plus GST.

Advertising Expense 250.00

GST-ITC 12.50

A/P EFG Co. 262.50Bought advert material.250.00 x 5% = 12.50

GST-ITC paid on any business-related purchase is recorded this way.


4-11Chapter 4: Provincial Sales Tax

PST Payable

A liability account used to keep track of the provincial sales tax charged on sales of goods/services.

Rates vary by province.Method of calculation also varies by province.



Western provinces (BC to Manitoba) base PST on the base price of the goods or service

Quebec and PEI base PST on the total after GST is added

Alberta & the 3 territories do not have PST

13%1



Calculating taxes in western provinces:

Sale $100.00

GST ($100 x 5%) 5.00

PST ($100 x 5%) 5.00

Total $110.00

Notice that both taxes are based on the $100 sale. However, GST is always calculated before PST.



Calculating taxes in Quebec:

Sale $100.00

GST ($100 x 5%) 5.00

Subtotal 105.00

PST ($105 x 7.5%) 7.88

Total $112.88

In Quebec and PEI, the provincial tax is based on the total after GST is added.



Recording a sale with PST (in PEI):

Bank 3465.00

Sales 3000.00

GST Payable 150.00

PST Payable 315.00Cash sales for the week.GST: 3000.00 x 5% = 150.00

PST: 3150.00 x 10% = 315.00

The journal entry is the same even though the method of calculating tax is different.


4-16Chapter 4: Recording Other Expenses with PST

PST is paid on most business expenses, such as advertising, supplies, utility bills, etc.

Note: There is not a PST-ITC account for PST paid on other expenses. Instead PST paid on other expenses is charged to the item itself (i.e. to the asset or expense account for the item bought).


4-17Chapter 4: Remitting PST

Every month, PST must be remitted to the provincial government.

PST Payable 2100.00

PST Commission Revenue 105.00

Bank 1995.00Remitted PST.

The debit to PST Payable reduces the balance of the liability account.

The debit to PST Commission Revenue accounts for the amount (if any) that the business is allowed to keep.

The credit to Bank shows the amount remitted.

The amount of PST that a business may keep will vary by province.


4-18Chapter 4: Calculating the Tax Included

Sometimes amounts presented in the exercises already have GST/HST (or both GST and PST) included.

Let's look at how to calculate taxes...



Example 1: A sales invoice of $840 includes 5% GST. How much GST is included in this invoice?

To find the amount of GST included in this invoice, multiply the invoice total by 5 and divide by 105.

The number 105 represents the 100% pre-tax value +

5% GST = 105%.

Therefore, $840 × 5 ÷ 105 = $40 GST



Since we now know the GST is $40, we also know that the pre-tax value is $840 ̶ $40 = $800.

Prove that the tax is correct by using the usual tax calculation:

$800 x 5% GST = $40



Example 2: A sales invoice of $339 includes 13% HST. How much HST is included in this invoice?

To find the HST, multiply the invoice total by 13 and divide by 113.

The number 113 represents the 100% pre-tax value +

13% HST = 113%.

Therefore, $339 × 13 ÷ 113 = $39 HST



Since we now know the HST is $39, we also know that the pre-tax value is $339 ̶ $39 = $300.

Again, prove that the tax is correct by using the usual tax calculation:

$300 x 13% HST = $39

KBC Decorating Co. HST Supplement 4


4-24Chapter 4: Sales Taxes in Canada

End of Chapter 4 – Sales Taxes in Canada

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