I was wondering... in Canada we have GST and for the most part, the amount of GST that one owes on a particular day is the amount of GST they collected minus the GST that they spent. However, like income tax, there are lots of weird rules like tax credits and you can only claim 50% of GST on food and entertainment... stuff like that.
For my business I would really like to know how must GST I owe TODAY. But since it is a complicated thing, its hard to get it exact. Is it OK to approx this value by simply:
GST owing today = GST collected - GST expensed ??
That way I can look at my balance sheet everyday and know what is really going on. Not sure if this is how it is done in the real world.
If you are accounting for your GST on the cash basis, it'd be"
GST payable = GST collected - GST paid
If you were accounting for your GST on an accrual basis, it'd be:
GST payable = GST charged - GST expensed
So does the GST authority allow for cash or accrual basis accounting? I'd think they'd want it as early as possible (ie: accrual basis) but realistically you can only pay for what you have collected (ie: cash basis).
There are a few things to know first: are you incorporated or not? Do you claim business use of home expenses or not? Do you take clients out to restaurants for meals/meetings? I can give you best advice when I know that.
I'm actually interested more generally in the problem so I'd like to know for all situations, because right now I'm not incorporated but will be soon.
Anyways, this is the conclusion that I've come to: You have to adjust your GST owing to the govt at the end of the month (or someother time period). The reason is that QuickBooks does not account for ALL the weird GST loopholes there are (like all the simple accounting GST rules for example).
Is this correct? So basically by balance sheet everyday will report GST owing just what I collected (or accrued). But then at month end I adjust with an ledger entry that hits Equity too, that reflects the proper GST owing.
There are no loopholes perse. Just that if you are using the Business Use of Home to claim expenses for keeping an office in your residence, you do not get Input Tax Credits for those expenses. For example, you claim 25% Use of Home. You claim 25% of the TOTAL gas bill, hydro bill, cable bill etc. but you don't include 25% of the GST as an Input Tax Credit.
Also, when you claim Meals & Entertainment expense, you only get to claim 50% of the expense (since you also feeding & entertaining yourself). Therefore, you only claim 50% of the GST for Meals & Entertainment for Input Tax Credits.
See what I'm getting at?
If you do your bookkeeping regularly the GST Payable on the Balance Sheet SHOULD be accurate.
There is no need to make any G/L adjustments at month end. Just set up a special tax code for the Meals & Entertainment (M) and that is, in Ontario anyway, 8% PST and 3% GST. This way your reduced GST input tax credit is already accounted for correctly with no need for adjusting.
When the return is prepared (annually, monthly or quarterly) I don't use the built-in tax remittance function. I print the BS, the G/L transactions to the GST payable account for the period and prepare the return from that. Then I just cut a cheque. Then the amount of the cheque is credited to the GST Payable account as the cheque is credited to the Bank.
Goes back to the days when QB CAN didn't recognize transactions posted to the GST Payable account that did not originate in the Sales or Purchases modules.
Ah ha! Your response was extremely helpful thank you. So I now realize that QuickBooks actually does have mechanisms in place to account for all the weird GST things going on so that your GST payable balance is always correct.
I will now have to figure out how to do these 'tax codes' that you speak of, but now at least I know that they exist!
I guess in some cases there could be a long list of tax codes, correct? You've got to have 'Meals & Entertainment', 'Home Expenses', 'Auto fuel', etc. Seems like a lot of work... I guess now I understand why the simple method is really simple, you would just have one tax code.
One more question... Does this same idea apply to personal or corporate income tax? That is, should quickbooks report a proper and correct 'Corporate Income Tax' payable? Cause that seems like another level of complexity that is going to make my head explode. I guess I thought since income tax is accrued at the end of the year, it is OK to record the full amount owing at that time... maybe I am wrong?
Thank you so much for your time and > nicklang wrote:
Ah ha! Your response was extremely helpful thank you. So I now realize that QuickBooks actually does have mechanisms in place to account for all the weird GST things going on so that your GST payable balance is always correct.
I will now have to figure out how to do these 'tax codes' that you speak of, but now at least I know that they exist!
I guess in some cases there could be a long list of tax codes, correct? You've got to have 'Meals & Entertainment', 'Home Expenses', 'Auto fuel', etc. Seems like a lot of work... I guess now I understand why the simple method is really simple, you would just have one tax code.
One more question... Does this same idea apply to personal or corporate income tax? That is, should quickbooks report a proper and correct 'Corporate Income Tax' payable? Cause that seems like another level of complexity that is going to make my head explode. I guess I thought since income tax is accrued at the end of the year, it is OK to record the full amount owing at that time... maybe I am wrong?
Meals & Entertainment - use M (set it up in Lists: Tax Codes). Gasoline - use G (should already be set up - make sure it's 6% not 7% in the Lists: Tax Codes) Use of Home - use the period (.) for Not Used or leave it blank (already set up) Everything else - use S for GST 6% and whatever your provincial RST is (already set up)
No. You don't know how much tax is payable until you prepare your return. Once you know that you can post a G/L entry to Income Tax Payable. If you have to pay installments, you post your credit entry for the cheque to the CRA to either your Income Tax Payable or a Provision for Income Tax account.
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