Businesses with sales over $30,000 CDN must register for a business number and charge 7% GST on their services or products, (6% beginning July 1, 2006). Just like the provincial retail sales tax (PST), to be compliant with the government, you must report and remit these collections over to the goverment. About this extra 7% money – it is “trust funds” – this money is not your extra profit. It’s money you collected as an agent or on behalf of the government and believe me .. they want it.
The good news, is that everybody else is also charging you GST, and you are allowed to deduct these GST payouts, or “Input Tax Credits” (GST ITC’s), to offset the amout that you have to remit. It is for this basic reason that bookkeepers (and business owners) and ME … are quite conscious to be sure to correctly separate the GST ITC from the expense amount, in order to maximize the refund or minimize how much Net GST the client has to pay.
Now .. I’ve written before the proper, or rather the “recommended” way to code your cheque stubs … but I don’t always have that luxury all the time.
Many times, when I receive the cheque stubs .. the client does not separate the GST and just writes the amount of the cheque. There are also times when I never receive any cheque stubs and just enter from the bank statements. It’s annoying when there is no breakdown of the GST on the face of the cheque, because it’s the person writing the cheques – the client – that should be concerned most with claiming this amount. In good times, it makes it easier when cheques are issued, because it usually represents payment in full. However, in slow times .. I often just see payments like $400 on account, $1,500.00 on account, etc etc.
FIRST OF ALL … I should note that I charge by the hour, and “Time IS Money”. When client’s do not separate the GST on the cheques, it takes me more time to calculate the GST and thus it takes me more time to complete a job, and my fees are usually higher
There are three ways that I input cheques into the G/L program, depending on the sheer number of transactions. Let’s suppose we have two cheques … one for $107.00 and $57.00. The first cheques represents a payment with GST only ($100.00 plus $7.00 GST) and the second cheque includes GST and PST ($50.00 plus $3.50 PST plus $3.50 GST).
Each Cheque Is a Journal Entry
This is how I would go about inputing the cheques ..
1) take calculator .. $107 divide by 1.07 = 100.00
2) enter into system – DEBIT expense $100.00
3) enter into system – CREDIT bank full cheque amount ($107.00)
4) my program tells me I am negative $7.00 so, I know exactly what GST to input – DEBIT $7.00
For the second cheque, I recognize that it might have PST and GST (a payment to a non-supplier of goods for resale) and would just take $57.00 divide by 1.14 times 1.07 = $53.50 and repeat above. Although, for cheques that are not as easily recognized and have weird amounts .. it is possible that I just do exactly as the first cheque and just take $57.00 divide by 1.07 = $53.27 thus the GST that would be recorded would end up being $3.73 – instead of $3.50.
Did you see that? This could create problems if you are ever audited by the government. You might think it is worth to save time and cut corners or claim a little EXTRA here and there .. but from my experience .. it’s never the amount that becomes the question – it’s the uncertainty of other stuff that becomes attached to this issue. If you are shaving a little extra here .. what ELSE are you doing wrong?
I just enter the expense and GST only
Already, I have saved 33.333% of the transactions by doing it this way, because instead of entering the cheque total amount each time I input a cheque, I wait and enter the Grand Total of all cheques only at the end of the transaction entry. For instance, it would be entered, GST calculated in the same way as with the first situation ..as
1) First cheque – DEBIT Expense $100.00
2) DEBIT GST $7.00
3) Second cheque – DEBIT Expense $53.50
4) DEBIT GST $3.50
My current G/L program of choice (Microware’s Client Strategist) prints a subtotal separated by cheque reference so the hard copy will display the total amount of the cheque. Although, in the payee or description area I always add the full amount of the cheque just in case .. e.g. I would add .. / $107.00 / after the payee name.
Too many cheques – Keeping It Simple Stupid method
When there are clients who issues more than 500 cheques in a year (and I’m not doing the monthly, but entering all the year’s cheques at once) .. just doing it the above way actually doubles the time for me. Recently, I am just in the process of completing a client who had almost 6,500 lines of transactions including the sales for a 12 month period. Half of these, however, were initiated by recurring entry code “99” .. but 3,250 transactions are a lot. I don’t separate the GST on the cheques which, were about 1/3 of that figure.
What I do is just enter the full amount of the cheque into the G/L. For every type of expense I would create extra G/L accounts to accomodate me. For instance, bank charges do not have GST but cost of printing cheques do. So, I would have two accounts ..
6050 – Bank charges
6051 – Bank charges w/GST
I should not that some accounts may have GST and some have both GST and PST. I may sometimes create two accounts for that situation .. where it helps me with the calculation of GST, but I would combine the two accounts immediately afterwards.
5130 – Supplies w/GST only
6130 – Supplies
This way, at the end of the year I just take the total amount of each of the G/L accounts and estimate a grand total of GST included in that account, and make the appropriate journal entry.
An Easy Way To Calculate GST
For all of the above options … I make it easier for myself – I don’t use my calculator to calculate the difference for taxes .. I use EXCEL. I created a dummy excel spreadsheet with the calculations to automatically calculate what the expense would be if there was only GST or if there was both PST and GST.
Here is a screen image of my dummy excel spreadsheet:
If you are not proficient with Excel .. this is how it works:
* Column F, Row 6: this is where I input the amount of cheque. For bank statements that are microfiched, I just enter a page at a time.
* Column G, Row 6: @round((+F6*7/107),2)
* Column H, Row 6: +F6-G6
* Column J, Row 6: +F6
* Column K, Row 6: @round((+F6*7/114),2)
* Column I, Row 6: +J6-K6
>> After July 1, 2006 .. the formulas should be changed to 6/106 and 6/113
Just seeing the expense of the GST only usually gives me indication whether or not PST is included or not .. because the amount before taxes is usually a common or round number or … well, look at the line with the $57.00 .. when it comes time to input this cheque into the G/L system, my eyes would immediately go to the GST in the right side.