Sales Taxes

In normal business transactions, who benefits? The seller and the buyer. These transactions also benefit the economy because the transactions are taxed (usually). This money is then used to pay for…stuff.

How much does the government get?

Sales Taxes The money created by these transactions are called sales taxes. There are all sorts of laws that describe what things are taxed and what aren’t, what forms businesses need, etc. These laws are always changing. Two levels of government have different taxes for different things; they come and go. POINT IS…taxes are complicated.

Sales Taxes Because of how complicated taxes can be, businesses need accountants to help deal with them. There are four things we need to think about taxes. 1. Tax dollars are charged to the buyer of the goods. 2. The tax dollars are collected by the seller and recorded in a separate liability account. 3. The tax dollars belong to the government. 4. The seller sends the tax dollars to the government at appointed times.

Types of Taxes In Canada, we have the Goods and Services Tax (GST), the Provincial Sales Tax (PST), and the Harmonized Sales Tax (HST).

Retail Sales Tax (Provincial Sales Tax) Retail sales taxes are added to the final consumers of goods (and a small amount of services). The goods that have PST on them are usually bought at the retail level. -Most individuals do their shopping at this level. -Businesses also pay this tax if they are the final consumer. In Canada it is usually called the PST because it is the provincial governments that organize it.

Retail Sales Tax (PST) The Purchaser If a good is $100, we record the total cost of the goods. In Ontario this would be ($100 x 13% = $113). Textbook Bank Dr 113 Cr 113

Sales Taxes (PST) The Seller Little bit more complicated. The tax has to be collected in a separate account. Bank Sales Dr 113 Cr 100 PST Payable Cr 13 Dr 13 Dr 13

Value-Added Sales Taxes Retail taxes are only charged to the final consumer. Value-added taxes are charged at every level of a product or service’s life. For example. If we buy a chair for $400, 13% tax would make it cost us $452. PST means we pay for it at the end of the transaction. Here is what happens when we use a value-added tax like HST:

HST – Who pays? When?

Sales Taxes GST has existed in Canada only since It was hated when it was introduced. It was charged with PST. Four provinces have since moved to HST. This allows easier accounting for businesses. -Only one remittance payment, not two.

Sales Taxes Any business that sells $30,000 or more of goods and services have to register with the Canada Revenue Agency (CRA). They get a unique number. They are told if they have to give tax money every month, every quarter, or once a year.

Accounting for Value-Added Taxes We have to add to the four principles we learned for retail taxes. 1. Tax dollars are charged to the buyers of goods and services. If the buyer is a business, that business keeps track of the HST charged on its purchases in a separate account. (HST is applied to a lot of services) 2. Tax dollars are collected by the seller and recorded in a separate account. 3. Tax dollars belong to the government. 4. The seller sends these tax dollars to the government, minus the HST it has paid on its purchases in the same time period.

Accounting for Value-Added Tax Buying businesses should record the HST they pay because they are allowed to deduct what they pay from what they collect.. Businesses are refunded the HST they pay. It is the consumer at the end that pays the tax.

Selling Goods and Services with the HST HST is charged and collected by a business whenever a sale is made. Brookswood Driving School sold lessons for cash that totalled $20,000 in August. With a 13% HST, the entry would be: Now, if Brookswood purchased $5000 worth of material in the same month, they would have paid (how much in HST? They are allowed to subtract that amount from the HST that they have to pay to the CRA.

The Accounts for HST For recording HST, you’ve seen HST PAYABLE already. Credits show HST charged to customers, debits show the HST paid on purchases. The difference is what the business owes to the CRA. The CRA wants to know -HOW MUCH DID THE BUSINESS TAKE IN FROM HST -HOW MUCH DID THE BUSINESS PAY IN HST

The Accounts for HST It will be difficult to figure out the totals using only one account. Only the account balance is moved to the trial balance. Some accountants prefer to see different accounts for this. We would have:

The Accounts for HST If you notice, the HST recoverable account is considered a liability even though it is worth money to us. This is called a contra account. We keep it there because it is not actually a “value” to us, it simply reduces what we owe. You will use these for most of the exercises for this section.

The Accounts for HST We now have to clear an account balance. When we record a remittance, we have to bring the accounts to zero. For Brookswood Driving School, the entry would look like this:

Homework for Thursday Page (EXERCISES) #1-4