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ACCOUNTING ACCOUNTING PRINCIPLES PRINCIPLES

Third Canadian EditionThird Canadian Edition

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Goods and Services Tax (GST)Goods and Services Tax (GST)Provincial Sales Tax (PST)Provincial Sales Tax (PST)

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

Types Of Sales TaxesTypes Of Sales Taxes

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Good s an d Services Tax ( G ST)Good s an d Services Tax ( G ST)

A federal sales tax on most goods and services A federal sales tax on most goods and servicesprovided in Canadaprovided in CanadaA 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 year has revenues of more then $30,000 in any year

Although registrants pay GST themselves, they Although registrants pay GST themselves, theycan claim ancan claim an input tax creditinput tax credit (ITC) against the(ITC) against theGST they collect from customersGST they collect from customersGST is remitted to the Receiver GeneralGST is remitted to the Receiver General

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P r o vincial Sales Tax ( P ST)P r o vincial Sales Tax ( P ST)

Charged onCharged on retail salesretail sales of certain goods andof certain goods andservices and applied to the selling price before GSTservices and applied to the selling price before GST(except in Quebec and PEI)(except in Quebec and PEI)Companies that apply for PST exemption numbersCompanies that apply for PST exemption numbersare not charged PST on goods purchased for are not charged PST on goods purchased for resaleresaleTaxes are remitted to the provincial Minister of Taxes are remitted to the provincial Minister of Finance or Treasurer Finance 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 theapplied to the total of the selling price plus GSTselling price plus GST ))PST rates vary by province and may not be appliedPST rates vary by province and may not be appliedat the same rate to all taxable goods and servicesat the same rate to all taxable goods and servicesCertain goods are exempt, such as personalCertain goods are exempt, such as personalservices, children¶s clothing, and booksservices, children¶s clothing, and books

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Harm o nize d Sales Tax ( HST)Harm o nize d Sales Tax ( HST)

In Newfoundland, Labrador, Nova Scotia, andIn Newfoundland, Labrador, Nova Scotia, andNew Brunswick, GST and PST have beenNew Brunswick, GST and PST have beencombined into thecombined into the Harmonized Sales Tax (HST)Harmonized Sales Tax (HST)HST is a combined rate of 15% on the sellingHST is a combined rate of 15% on the sellingpricepriceHST returns are submitted quarterly or monthly toHST returns are submitted quarterly or monthly tothe federal government, which then gives thethe federal government, which then gives the

provinces their portionsprovinces their portions

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Sales taxes collected by a business isSales taxes collected by a business is not anot asource of revenuesource of revenue for the companyfor the company

Sales tax is collected on behalf of the federalSales tax is collected on behalf of the federaland provincial governmentsand provincial governmentsSales tax collected is aSales tax collected is a current liabilitycurrent liability to theto thecompany until remitted to the government atcompany until remitted to the government at

regular intervalsregular intervals

Sales Taxes C o llecte d o n ReceiptsSales Taxes C o llecte d o n Receipts

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Tax o n ServicesTax o n 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 exemptservices provided. In Ontario, legal services are exemptfrom PST, so only 7% GST is charged. Note revenue isfrom PST, so only 7% GST is charged. Note revenue isrecorded at $500, not $535. GST is recorded as arecorded at $500, not $535. GST is recorded as acurrent liability.current liability.

J1Da e cc ou n Ti e and x ana i o n e Debi rediay 28 ccounts eceivable 535.00

egal ees Earned 500.00

GST Payable $500 x 7% 35.00To record revenue earned onlegal fees.

Genera J ou rna

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Cleaning services provided by a company inCleaning services provided by a company inSaskatchewan for cash. These services are subject toSaskatchewan for cash. These services are subject toboth PST (6%) and GST (7%). Both the PST and GSTboth PST (6%) and GST (7%). Both the PST and GSTare recorded as current liabilities.are recorded as current liabilities.

J1Date Account Title and Explanation Ref Debit CreditJul 4 Cash 282 .

Cleaning Services evenue 250 .00

PST Payable ( 6%) 15 .00GST Payable ( 7%) 17 .50

To record revenue earned oncleaning services.

General Journal

Tax on S er vice sTax on S er vice s

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Cleaning services provided for cash in NewCleaning services provided for cash in New

Brunswick, where the HST is 15%. Note that theBrunswick, where the HST is 15%. Note that theHST is recorded as a current liability.HST is recorded as a current liability.

J1Date Accou n t Title a n Expla n atio n Ref Debit Credit

ul Cash 287.50Cleaning Services evenue 250.00HST ayable 5 15% 37.50

To record revenue earned oncleaning services.

Ge n eral Jour n al

Tax o n S er vice sTax o n S er vice s

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Tax o n Good sTax o n Good s ± ± SalesSales

Sale of $1,000 of office furniture, on credit, in Ontario (PST %,Sale of $1,000 of office furniture, on credit, in Ontario (PST %,GST 7%). The company uses the perpetual inventory system andGST 7%). The company uses the perpetual inventory system andthe cost of the goods is $ 00. Under the periodic inventorythe cost of the goods is $ 00. Under the periodic inventory

system the second entry would not be recorded.system the second entry would not be recorded.

ate o nt T tle an d Ex lanat o n ef e t e di tay 0 ccounts eceivable ,

Sales ,GST Payable ($1,000 7%) 7

PST Payable ($1,000 %) 8To record sale of officefurniture on account.

0 ost of Goods Sold 8erchandise nventory 8To record cost of merchandisesold.

G ene al o r nal

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Sales Taxes P ai d o n is u rsementsSales Taxes P ai d o n is u rsements

Purchase of Merchandise for ResalePurchase of Merchandise for ResalePST is a singlePST is a single- -stage taxstage tax collected from finalcollected from finalconsumersconsumers of taxable goods and servicesof taxable goods and services

Businesses with a registration number purchaseBusinesses with a registration number purchasemerchandise for resalemerchandise for resale exemptexempt of PSTof PSTGST charged on the purchase of merchandise for GST charged on the purchase of merchandise for resale is offset against any GST collected; GST paidresale is offset against any GST collected; GST paidis consequentlyis consequently notnot part of the inventory cost of part of the inventory cost of merchandise purchasedmerchandise purchasedThe GST paid on purchases is debited to anThe GST paid on purchases is debited to anaccount called GST Recoverable and is called anaccount called GST Recoverable and is called aninput tax creditinput tax credit

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P u rchasesP u rchases

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 $ ,000, on account, using a perpetual inventory system.$ ,000, on account, using a perpetual inventory system.The GST is recorded as a receivable using the account GSTThe GST is recorded as a receivable using the account GSTRecoverable. Under the periodic inventory system, theRecoverable. Under the periodic inventory system, the$ ,000 debit would be to Purchases.$ ,000 debit would be to Purchases.

a te cco un t itl e a n la n a tio n e f e it re itay erchandise nventory 4, .

GST Recoverable $ ,000 2 .ccounts Payable 4, 2 .To record goods purchased onaccount.

Ge n era l o u r n a l

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P u rchase Ret u rns an d Allow ancesP u rchase Ret u rns an d Allow ances

A $300 return of merchandise on May . Note that the GST A $300 return of merchandise on May . Note that the GSTRecoverable account is credited instead of the PST PayableRecoverable account is credited instead of the PST Payableaccount 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 haveUnder the periodic system, the credit of $300 would havebeen recorded to the Purchase Returns and Allowancesbeen recorded to the Purchase Returns and Allowancesaccount.account.

ate Acc o u nt itle an d E lanat io n Re e it re d itMay Accounts Payable .

GST Recoverable $300 .Merchandise nventory .

To record the return of oods.

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Operating ExpensesOperating Expenses

Purchase of Goods for UsePurchase of Goods for UseWhen taxable goods and services are used in theWhen taxable goods and services are used in theoperation of a business, the PST forms part of theoperation of a business, the PST forms part of the

asset or expense that is being acquiredasset or expense that is being acquiredGST charged on the purchase of goods for use in aGST charged on the purchase of goods for use in abusiness is recoverable and can be offset as anbusiness is recoverable and can be offset as aninput tax credit against GST collectedinput tax credit against GST collected

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Operating ExpensesOperating Expenses

This entry is for a purchase of office supplies for $ 00 cashThis entry is for a purchase of office supplies for $ 00 cashin Ontario (PST %, GST 7%). The cost of the suppliesin Ontario (PST %, GST 7%). The cost of the suppliesincludes both the supplies and the PST. Because GST isincludes both the supplies and the PST. Because GST isrecoverable, it does not form part of the asset cost but isrecoverable, it does not form part of the asset cost but isdebited to the GST Recoverable account.debited to the GST Recoverable account.

ate unt it le an Exp lanati n e e it re itay Office Supplies ($ 00 + $ PST) 6 .

GST Recoverable ($ 00 7%) .ash .To record purchase of officesupplies.

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The same purchase recorded in Prince Edward Island (GSTThe same purchase recorded in Prince Edward Island (GST7%, PST charged on GST at 10%). Note that the provincial7%, PST charged on GST at 10%). Note that the provincialsales tax base includes both the cost of the item and thesales tax base includes both the cost of the item and theGST. Hence, PST is determined by multiplying 10% by $ 1GST. Hence, PST is determined by multiplying 10% by $ 1($ 00 GST of $1 ). Because GST is recoverable it does($ 00 GST of $1 ). Because GST is recoverable it doesnot form part of the asset cost.not form part of the asset cost.

Date Account itle and lanat ion ef Deb it Cred itay 1 ffice Supplies ($ 00 $ 1. 0 PST) 221 .4

GST ecoverable ($ 00 x 7%) 14.ash 235 .4To record purchase of officesupplies.

O erat in g en s e sO erat in g en s e s

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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 PSTis charged on GST at 10%. Note that PST on $1,070 ($1,000is charged on GST at 10%. Note that PST on $1,070 ($1,000

$70 GST).$70 GST).

Date Account itle and lanat ion ef Deb it Cred ita 0 ffice urniture ($1,000 $$107 PST) 1 107 .00

GST eco era le ($1,000 7%) 70 .00ccounts Pa a le 1 177 .00To record purchase of officefurniture.

P ropert y P lant and q u ip m entP ropert y P lant and q u ip m ent

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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 fullyrecoverable 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.

D a te ccount itle and lanat ion ef D eb it ed itay 0 ffice urniture $1,000 1 107 .00

HST ecoverable $1,000 15% 150 .00ccounts ayable 1 150 .00To record purchase of officefurniture.

P ope t y P lant and q u i m entP ope ty P lant and q u i m ent

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Remittance Of Sales TaxesRemittance Of Sales Taxes

Businesses collect taxes on behalf of theBusinesses collect taxes on behalf of thegovernment when the sale occurs andgovernment when the sale occurs andperiodically remit them to the appropriateperiodically remit them to the appropriate

government agencygovernment agencyGST and HST remittances are reduced byGST and HST remittances are reduced byclaiming input tax creditsclaiming input tax credits

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G ST/ HSTG ST/ HST

When remitting GST (or HST), the amount of GST payable isWhen remitting GST (or HST), the amount of GST payable isreduced 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 atThe GST owing is credited to cash. GST (HST) is remitted atspecific dates, depending on the volume of sales. If GSTspecific dates, depending on the volume of sales. If GSTrecoverable exceeds GST payable a refund is receivable andrecoverable exceeds GST payable a refund is receivable anda debit to cash would be recorded.a debit to cash would be recorded.

A u Ti l l i i r iun GST ayable 6 .

GST Recoverable , .ash , .To record remittance to Rfor GST

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CONCLUSIONCONCLUSION

Sales tax law is intricate and has addedSales tax law is intricate and has addedcomplexity to the accounting of transactionscomplexity to the accounting of transactionswhich flow through today¶s businesseswhich flow through today¶s businesses

Before recording sales tax transactions it isBefore recording sales tax transactions it isimportant to understand all of the relevant salesimportant to understand all of the relevant salestax regulationstax regulationsCheck the federal and provincial laws in your Check the federal and provincial laws in your

jurisdiction. jurisdiction.

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CO PY RIG HTCO PY RIG HT

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