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How To Record Goods and Services Tax [GST]

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You pay Goods and Services Tax [GST] on goods you purchase, and charge your customers GST on goods you sell. You must remit to the government the amount of GST you charge your customers, less any GST you pay on business-related purchases that qualifies as an input tax credit. This post provides basic guideline on how to the Goods and Services Tax [GST].

 

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Preparing for Tax Accounting

Before you set up your accounting system, you should take steps to prepare for tax accounting. If you have not already done so, you should consult an accounting professional for the latest tax information, and for advice on the impact the taxes will have on your particular business.

 

 
Setting Up General Ledger Accounts

You would need to set up accounts to keep track of the GST. In the General Ledger, create the following current liability accounts for GST:

  • GST Charged On Sales
  • GST Paid On Purchases
  • GST Adjustments [optional]
  • GST Payroll Deductions [optional]
  • GST Owing [Refund]

By grouping all the GST accounts together you can easily see how much you owe the government, or how much the government owes you.

 

 
GST Paid on Business-related Purchases

The GST that you pay on business-related purchases is not an expense or a cost of inventory if it qualifies as an input tax credit. You account for it separately and claim it back from the government.

If you purchase inventory for $100, and pay GST at 10 percent, the journal entry to record the purchase might look like this:

[Debit]. GST Paid on Purchases = $10.00
[Debit]. Inventory = $100.00
[Credit]. Cash = $110.00

 

 

GST Charged On Sales

When you sell goods and services to customers, you must account for the GST too. The GST you charge your customers must appear on invoices. The GST can be charged either separately or included in the selling price. If GST is included in the selling price, it must be clearly indicated which items are taxed.

Note: Not all items are subject to the Goods and Services Tax. You should check the regulations to see which goods are tax-exempt or zero-rated.

 

When you sell item A for cash at $200.00 with GST at 10%, the journal entry to record the sale would be:

 

[Debit] Cash = $226.00
[Credit]. Revenue = $200.00
[Credit]. GST Charged on Sales = $26.00

And;

[Debit] Cost Of Goods Sold = $226.00
[Credit]. Inventory – Product A = $100.00

 

 

GST Payroll Deductions

If your employees receive benefits that are subject to the GST, you should set up a GST Payroll Deduction account in the General Ledger. GST for benefits provided to employees can be charged and reported annually when you print payroll slips, or you may choose to deduct the GST from each paycheck.

Example: If an employee has a taxable benefit of $120, with GST at 10%. When a paycheck is produced, $12.00 is deducted from the employee’s paycheck and recorded as an increase in the GST Payroll Deduction account.

 

 
Adjustments on GST

On occasion, you may have to record GST for transactions that are not sales or purchases. Do not use the GST Charged On Sales or GST Paid On Purchases accounts to make these adjustments. Instead, make journal entries using the GST Adjustments and Adjustments accounts. Use the GST Adjustments account to record GST you owe the government for transactions that are not sales.

For example:

  • The GST portion of a bad debt that has been recovered.
  • The GST portion of a bad debt that is written off.
  • The GST rebate a builder pays or credits for new housing.

 

 

Clearing the GST Accounts

When you remit the GST you owe [or receive your refund], post the check against the GST accounts to prepare them for the next reporting period.

Example: Using the same examples we use on the previous section, the journal entry to record the remittance and clear the tax account would appear as follows:

[Debit]. GST Charged on Sales = $26.00
[Debit]. GST Payroll Deductions = $12.00
[Credit]. GST Paid on Purchases = $10.00
[Credit]. Cash = $28.00

 

Once the journal entry made, all the tax account will be washed and clear to zero balance.

19 Comments

19 Comments

  1. Eileen

    Oct 14, 2011 at 6:32 pm

    I had a question about GST paid on purchase. As the amount paid can be offset against any future GST liability owing to the taxation authority.. If it is not an expense, how do we classify it?

  2. Sokha

    Jul 11, 2013 at 4:23 am

    When you sell item A for cash at $200.00 with GST at 10%, the journal entry to record the sale would be:
    [Debit] Cash = $226.00
    [Credit]. Revenue = $200.00
    [Credit]. GST Charged on Sales = $26.00
    And;
    [Debit] Cost Of Goods Sold = $226.00
    [Credit]. Inventory – Product A = $100.00

    * how to calculate Cash $ 226 GST 10 % why tax $ 26

  3. muzailin

    Feb 24, 2015 at 2:10 am

    how to record supply and purchase product for exempt and zero rated

  4. Ling

    May 27, 2015 at 3:59 am

    how to do the accounting entries when import goods under ATS approval.

  5. aavel7

    Jul 25, 2015 at 3:01 am

    Refer in your statement above, seem it is not balance?…
    (Debit] Cash = $226.00
    [Credit]. Revenue = $200.00
    [Credit]. GST Charged on Sales = $26.00

    And;

    [Debit] Cost Of Goods Sold = $226.00
    [Credit]. Inventory – Product A = $100.00

    Why the cost of goods sold is $ 226, whether he’s purchase the inventory $ 100 ? how to entries the GST cost?

    • Christine

      Oct 16, 2017 at 3:16 pm

      Cost of Goods Sold should be $100 as well.

  6. Diane

    Dec 30, 2015 at 9:43 pm

    the company sold a building and land we had to pay GST on the sale how is this recorded

  7. Tharani

    Aug 30, 2016 at 2:50 pm

    May I clarify GST Refund ( is income or asset) GST owe (expense or liability).

    I think it will go under P&L as we hv to pay within 1 year.

    Please assist me.

  8. HAREESH.E

    Oct 19, 2016 at 6:05 am

    i don t get it

  9. Vijay Dayma

    Dec 1, 2016 at 10:47 am

    VAT charges on sales value, while GST charges on cost value that is major difference.

  10. Ridhi

    Dec 5, 2016 at 8:45 am

    Under which head GST on Sales & GST on Purchases be accounted i.e Current Liabilities or Current Assets? Can i get a clarification whether how is the COst of Goods Sold arrived as $226 in the above example given?

  11. Krishan

    Feb 7, 2017 at 11:36 am

    when do you entry of GST Sale and Purchase. You will only change the Tax Word Like In ( Vat ) you have to use the SGST and CGST.

    Purchase entry :
    Purchase a/c Dr.4166
    SGST Input 10% a/c Dr.417
    CGST Input 10% a/c Dr.417
    To Party A/c Cr. 5000

    Sales Entry :
    Debtors a/c Dr. 5000
    To Sales a/c Cr. 4166
    To SGST Output 10% Cr. 417
    To CGST Output 10% Cr. 417

  12. idonbeliveit

    Mar 3, 2017 at 3:01 pm

    When you sell item A for cash at $200.00 with GST at 10%, the journal entry to record the sale would be:
    [Debit] Cash = $226.00
    [Credit]. Revenue = $200.00
    [Credit]. GST Charged on Sales = $26.00
    And;
    [Debit] Cost Of Goods Sold = $226.00
    [Credit]. Inventory – Product A = $100.00

    * how to calculate Cash $ 200 GST 10 % is 220 from where did the 26 come from?

  13. naresh reddy

    Mar 27, 2017 at 10:55 am

    Material required for GST genral entries

  14. SEAN

    Apr 8, 2017 at 7:36 pm

    Cash $ 200 GST 10 % is 220 from where did the 26 come from?

  15. vinay tiwari

    Jul 5, 2017 at 6:42 am

    My self vinay b tiwari, i am accountant, gst is good tax for business gst charged on sale, gst paid on purchase

  16. ROHAN

    Aug 13, 2017 at 10:32 am

    SUPPOSE ABC COMPANY RECEIVED ELECTRICITY BILL AMOUNTING 240 (INCLUDING GST) IN MAY 1 WHAT WILL BE THE JOURNAL?

    SIMILARLY IF THE BILL IS PAID ON MAY 30 WHAT WILL BE THE JOURNAL ENTRY?

  17. Elon

    Sep 4, 2017 at 1:14 am

    Hello, I paid the HST after 9 months for the last year’s. Now I need to file the business return. How I will report for the year 2016 HST payable account. Should I show a credit balance in HST payable account or should I adjust it and bring it zero.

  18. Keith

    Sep 26, 2017 at 9:06 pm

    How do you account for exchange rate differences? US company has it’s books in USD and pays the GST/HST in Canadian Dollars. How do you book the entry?

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