BAF3/4M TAXES: HST

OVERVIEWIn this activity, we will learn about the taxes involved in accounting transactions (Provincial Sales Tax and Goods and Services Tax). Also, at the end of this activity, we will understand the effects these accounts have on daily business transactions.Overall Expectations FAV.03 demonstrate an understanding of the basic

procedures and principles of the accounting cycle for a service business.

Specific Expectations AF2.01 describe the accounting practices particular to sales tax (e.g., accounts required, financial statement presentation);AF2.02 record transactions related to provincial sales tax (e.g., collections, remittance);AF2.03 record transactions related to federal sales tax (e.g., collections, remittance);FA3.02 record transactions using the journals and ledgers of a service business.

As we all know, we don’t live in a world without tax. That means that we have to know how to record transactions and take sales taxes into account.

There are two kinds of taxes in Ontario:

PROVINCIAL FEDERAL8% of ticket price 5% of ticket price

In 2010, these taxes were combined in Ontario to create HST (Harmonized Sales Tax) 13%

When you buy anything at the store you pay tax. For example, if a pair of jeans cost $100 on the ticket price, you will pay $113 at the register. WHY?

The store only makes $100 off the item (this is their REVENUE- the business keeps this)

The government makes that extra $13 and splits it between the provincial and federal governments: 8% to Queens Park and 5% to Ottawa.

As an accountant this is important: Taxes collected on sales are a LIABILITY (they must be paid to the government) they are called “HST Payable”.

Businesses get the HST they pay on things back this is called “HST Recoverable” – the amount that they can ‘recover’. Basically, businesses don’t PAY any HST, they just have to charge it. They pay the HST up front but get it back later. This is a tax break that businesses get that individuals do not.

These accounts are called contra- accounts because they are associated with or (‘married’ to) a regular account. They are called contra because they act in a

BAF3/4M TAXES: HST

contra-ry way to the account they are married to. They come in pairs because you combine their values to calculate a ‘net total’.

HST Payable and HST Recoverable are contra accounts—by subtracting one from the other, you can determine how much you need to pay the government.

Accounting for HST if you are SELLING something:Calculate the tax on taxable goods or services and add it to the sales invoice.

BAF3/4M TAXES: HST

Price x 1.13 = price with tax included

SPARKLES CLEANERS123 Any StreetAny Town, ONA1B 2C3 Invoice: 777

Phone: (123) 456-7890 FAX: (123) 456-0987

To: ABC Bank987 Any StreetAny Town, ONB2C 3D4

For: Cleaning and maintenance 1,800$ services for September 20--

Total 2,034$

HST #: R007512392 TERMS: Net 30 Date: Sept. 25, 20--

HST (13%) 234

Accounting for HST if you are BUYING something as a business:

HST PAYABLE b/c you have sold a good or service

This is how your journal entry would look if you sold something.

It is simple: just add another line underneath the sale for the amount of the HST Payable

BAF3/4M TAXES: HST

In order to recover the HST added by the seller, the purchaser must account for it.   

The purchase invoice is the source document for the transaction.

BAF3/4M TAXES: HST

HST Recoverable

In this case it is HST Recoverable because the business bought something.

BAF3/4M TAXES: HST

HOW DO THEY GET THE MONEY BACK? Most businesses are required to file monthly and must remit the net tax

owed within one month following the end of their reporting period.

BAF3/4M TAXES: HST

HST ON THE BALANCE SHEET: The smaller account balance is subtracted from the larger. If the difference is a CREDIT, it is shown in the Liabilities section. If the difference is a DEBIT, it may be shown in the Assets section.