HOW TO PROCESS GST ENTRIES?

CORRECTNESS OF GST REPORTS

Users must test the correctness of GST reports to ensure their submission is good.

1.    Gross Profit Test 

In typical accounting, the GST to pay is net of the sales (output tax) to the purchase (input tax) – the difference between these 2 values is generally the gross profit of the company. 

For example, if the Sales is $100,000 (collect $7,000 in Output Tax) and the Cost of Sales is $80,000 (paid $5,600 in input tax), the Gross Profit is $20,000. The net payable GST to the tax department should be $1,400 (equivalent to 7% x Gross Profit), subject to other tax variants during the period like out-of-scope transactions and non-GST purchases etc. 

Note: If you have a Gross Profit of $20,000 with a GST payable of $3,000, then something could be wrong. It warrants further investigation whether this figure should be accepted.

2.    GL Ledger Listing for GST Versus  GST Grouping Details

Every transaction with a GST component post to the General Ledger for GST Input Tax and Output Tax, and can be viewed by the GL Ledger Listing report.  Every transaction that selects a tax code (sales or purchase invoices) posts the GST type to the line details, and shows up in the GST Grouping Details report.

Therefore the GL Listing report can be used as a test to the GST Grouping Details, whether the transactions are complete.

Note: These 2 reports are extracted from different data sources (by design) - the GL post to one table while line details are post to another. This design to extract reports from separate sources, and ensuring they tie - is a self-checking mechanism that reports are correct. As such there may be 1-cents differences in these reports due to mathematical rounding issues. It does not mean the reports are erroneous, if they are out of balance by that 1-cent up or down.

USE THE GST CLEARING ACCOUNT

We encourage users to transfer out the GST portion into a clearing account, pending payment to the tax department. This clearing account will keep the input/output tax intact to match the GST reports by details. 

Example: At the end of March 2021 (for 01/01 to 31/03 Quarter), assuming we have a total GST-Input Tax of $5,600 and a GST-Output Tax of $7,000, we should do this step: -

A.    Create a new GL Chart of Account called "GST Clearing Account" (Liability type)

A.    At end of the quarter, i.e. 31-March, we will pass a GJ journal entry to zerolizedthe GST Input & Output tax amount to the GST Clearing A/c. The entry will look like this:-

(*) – to zerolized the debit balance of $5,600 in the GST Input Tax Account.

(**) – to zerolized the credit balance of $7,000 in the GST Output Tax Account.

The GL balance for GST Clearing A/c will thus have a net of $1,400 in Credit.

B.    To make a payment to the tax department in the following quarter, in GC Cash Book:-

                                                          DR         CR

               GST – Clearing Ac/c                  1,400

               Bank A/c                                             1,400

C.    With above payment, the GST Clearing A/c would correctly be adjusted to zero. 

GST REFUNDS

You could have overpaid and receive a refund from the tax department. Note this is NOT an income. As tax computation and submission is an ongoing process, underpayment and overpayments will catch up, once the correct documentations are entered. 

Assuming we receives $300 as tax refund today, we should enter based on today’s date into the GST Clearing A/c. Do not back-date to the previous quarter. The process to enter is:

                                                          DR         CR

z

               GST – Clearing Ac/c                              300                   àadds $300 Cr to GST Clearing A/c

               Bank A/c                                 300

Assuming the next GST filingat the end of June (for 01/04 to 30/06 Quarter), there is a total GST-Input Tax of $7,000 and a GST-Output Tax of $8,000, we should do this journal: -

This journal will add to GST Clearing A/c a balance of $1,000 in Credit. To adjust the GST Clearing A/c (now $1300 Cr) to zero, the following entry in GC Cash Book will show: 

                                                          DR         CR

z

               GST – Clearing Ac/c                              1,300

               Bank A/c                                 1,300

HANDLING OF ROUNDING DIFFERENCE

It is possible when dealing with multiple decimals we faced with a report that is out of balance by 1-cent. Example:

Trial Balance                        GST Report

GST Input Tax $5600.00 (BR)           $5600.00 (Input)

    GST Output Tax     $7,000.01 (CR)          $7,000.00 (Output)ß note 1 cent extra in GL

In passing the journal entry to the clearing account, we will anchor the correct number based on the GST F5. Therefore the GST Clearing A/c will be passed as followed:

The GL balance for GST Clearing A/c will thus have a net of $1,400.01 in Credit.

Note: By tying the 2 reports so that GST per F5 and GST per TB, the 1-cent difference flows into the Rounding Difference A/c (which is a P&L item).. 

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