CHAPTER 4 Flashcards
GST
Under the Goods and Services Tax which applies to most goods (except fresh food) and services. The government charges consumers a tax of 10% of the price of what they have purchased. This means the business that sells the good/ service must charge and collect from the customer the selling price plus an amount for GST. The GST amount is then transferred to the ATO by the business at a later date.
When a business charges its customers GST, it does so on behalf of the government. As a result, any GST on sales creates a liability an amount of GST owed to the ATO. If the business has been charged any GST by its suppliers, it is allowed to deduct this GST on purchases from its GST liability. The GST on its purchases will be forwarded to the ATO by the firm’s suppliers, so it is treated as if the business had actually paid the GST straight to the government.
At the end of the period, the business must calculate how much GST overall it owes to the ATO, or whether it is owed a refund by the ATO. This means the accounting system must be capable of identifying, recording and reporting for the effects of GST
Recording GST
All transactions involving GST are recorded in a new ledger account called ‘GST Clearing’, which can either be a current liability or a current asset.
GST
GST Liability
Because selling prices are usually higher than cost prices, in most cases the GST on sales will be greater than the GST on purchases, so the business will have a current liability in relation to GST. This means that, overall, the business will owe GST to the ATO, which it will pay when it makes a GST settlement.
GST Refund
If the business makes a bulk order of stock (which it has not sold) or purchases an expensive non-current asset, then its GST on purchases could be greater than its GST on sales, so the business will have a current asset in relation to GST. This means the business will be owed GST by the ATO, which it will receive in the form of a GST refund.
Source documents
Source documents come in a variety of shapes and sizes, but have in common one essential quality: they provide the evidence, or proof, that a transaction has occurred. In fact, source documents are the first stage in the accounting process and provide the facts and details on which all subsequent accounting information will be based. Because source documents provide the evidence of the details of every transaction, they are integral in ensuring that accounting reports contain information that is reliable, or free from errors, bias and subjectivity.
Source Documents and the GST
Because of the GST, source documents must include the following information:
the words ‘tax invoice’ stated clearly
the name of the seller
the Australian Business Number (ABN) of the seller
the date of the transaction
a description of the good/service provided
the price of the transaction, including the GST
the amount of the GST.
Sales of more than $1 000 must also show the name, and address or ABN of the buyer. Without these details, the source documents cannot be used to substantiate GST transactions, and the business may end up paying to the ATO more GST than is required
Cash inflows and cash receipts
When cash is received, the business will issue a cash receipt to the customer, and keep a copy of the receipt for its own records. The cash receipt can be hand-written, or generated electronically or by a cash register. Some smaller businesses will not issue an individualised receipt to every customer, preferring instead to issue only a cash register receipt, and rely on the summary generated by the register to verify the cash received in a single day’s trading. Regardless of the type of receipt issued, it should contain all the information necessary to account for the GST, plus a receipt number for easy identification and verification.
Cash sales and GST
At the time a cash sale is made, the business will receive the cash for At the time a cash sale is made, the business will receive the cash for the goods, plus the GST on the sale, and this must be documented on a cash receipt. The GST does not affect the sales revenue earned, or the cost of the stock sold; instead, it is an additional amount collected on behalf of, and therefore owed to, the ATO.
3 advantages of paying by cheque
security— paying by cheque avoids the risks of carrying large sums of cash, and the danger of theft this entails.
traceability— cheques must be deposited into a bank account, meaning it is possible to trace the eventual recipient of the funds.
verifiability — all payments made by cheque are recorded on the cheque butt, providing a source document to verify the transaction.
Credit sales
Credit transactions effectively separate a sale or purchase into two transactions: the exchange of goods occurs first, with the exchange of cash only occurring at some later date. When stock is sold on credit and the goods are exchanged, the source document will be a sales invoice. Remember, the GST is recognised and reported at the time of the sale so the sales invoice must show all the information necessary for it to be classified as a tax invoice (particularly the amount of the GST), but the GST will not affect the revenue, expense or profit made on the sale.
Credit purchases
When goods are purchased on credit, the supplier will issue a purchase invoice, which must satisfy the requirements of the ATO to qualify as a GST document. A purchase invoice will look almost identical to a sales invoice, detailing the same information, but from a different perspective; this time it will specify not the name of the debtor and the goods sold, but rather the name of the creditor and the goods purchased
Memo
Some transactions will not be evidenced by any standard source documents, as they involve neither a sale nor purchase, nor the receipt or payment of cash. These transactions may include stock losses, gains, non-cash transactions with the owner and more.
These transactions must still be verified by a document, but it will be a document issued from within the firm, called a memorandum or memo. Memos can be issued for any number of transactions, and so their format is much more flexible than the other documents discussed so far. Put simply, they will describe a particular entry, and request that it is recorded.
Statement of account
A summary of the transactions a firm has had with a particular debtor/ creditor over a certain period of time (usually a month). Each transaction should be checked against the source document that was issued at the time to check its accuracy — and it may be a reminder to pay the creditor the balance owing — but no further recording is required when this statement is received.
Trial balance CHAP 3
Once all transactions have been recorded in the General Ledger, it must be checked to see that the accounting equation still balances; that is that the total debits equal the total credits. This check is carried out by presenting a which is a list of all the ledger accounts and their balances; the balance being the net amount left in an account.
Balancing CHAP 3
Footing is an Informal process that can be done to any account at any txme to determine its balance, But at the end of the reporting period, asset, liability and owner’s equity accounts must be formally ruled off, and their balance carried forward to the next penod,
so that their balances can be reported in the Balance Sheet. Balancing is ruling off an asset, liability or owner’s equity account to determine its balance at the end of the reporting period and transferring
that balance to the next reporting period.
