The Journal and Source Documents

1. The Journal and Source Documents Lesson 3: Harmonized Sales Tax (HST)

2. What is the Harmonized Sales Tax (HST)? • A combination of both the GST (Goods and Services Tax) and the PST (Provincial Sales Tax) • Implementation in Ontario effective July 1, 2010 • Subject to the same rules as for GST • Businesses with annual sales ≥ $30,000 must register • Each registered business is assigned a number and must remit the tax either monthly, quarterly or annually.

3. Impact in Ontario • The PST is being replaced with a value-added tax similar to the GST • Ultimately only the final consumer pays the tax • Objective is to reduce hidden taxes built into products currently being produced and purchased by consumers • The Ontario percentage will remain at 8% • When combined with the GST (5%), the total rate will be 13%

4. Impact in Ontario • More products and now services will be subject to the HST than was the case with the PST • Government of Ontario tax cuts implemented to help lessen the impact for individuals • Lower compliance costs for businesses • Administration of a single tax instead of two means: • one set of forms, • one payment, and • one point of contact for audits, appeals and taxpayer services

5. Accounting for the HST • Two methods: • Quick Method • Available to most small businesses (some exemptions) with annual sales/revenues ≤ $200,000 • Simplifies remittance calculations by applying a certain percentage to overall sales. Percentage varies by business type • No need to keep a separate account for tax paid on purchases • In order to use this method, you must file an election with Canada Revenue Agency

6. Accounting for the HST • Regular Filing: • Generally done either monthly or quarterly. Some smaller businesses file annually • If file annually must still make installment payments to the government based on prior year’s remittance • Complete and submit the Goods and Services Harmonized Sales Tax Return for Registrants • Follow same rules as for GST with separate accounts for Refundable and Payable portions

7. Accounting for the HST • Can claim rebate (Input Tax Credit – ITC) for the amount of HST paid on items purchased for business purposes • In effect, costs of purchases will increase but rebate/ITC claimed • Note that the increased short term cost may cause some cash flow issues for smaller businesses

8. Accounting for the HST • HST rebates/ITC’s on the Ontario 8% portion are however being limited • Financial institutions and businesses or groups of companies with annual sales of ≥ $10 million will not be able to claim the provincial component (8%) of their ITC’s on certain expenses • Restrictions are currently planned for the first five (5) years and then will be slowly phased out

9. Two Parts to the HST • Sales and the HST • The tax is added to the customer’s invoice, collected from the customer, and remitted (sent) to the government. • The sale can only take place one of two ways: • Pay now (Bank) • Pay Later (Accounts Receivable)

10. Two Parts to the HST • Purchases and the HST • All businesses are entitled to recover the GST portion (5%) charged by their suppliers. • Most businesses are entitled to recover the PST portion (8%) charged by their suppliers. (See previous restrictions discussed) • For teaching purposes we will always assume that the PST is recoverable by businesses. • Businesses have to pay the tax to the supplier, but are entitled to recover this tax from the government. • The purchases can only take place one of two ways: • Pay now (Bank) • Pay Later (Accounts Payable)

11. Accounting for the HST • There are two accounts for HST in the ledger: • HST Recoverable, and • HST Payable

12. Accounting for the HST

13. Accounting for the HST • In the Books of the Seller Step 1: Calculate the tax on taxable goods or services and add it to the sales invoice.

14. HST Number HST

15. Accounting for the HST Note the following: • The company’s HST number must be reported on the sales invoice. • HST amount of $234. • The sales invoice is the source document for the accounting entries in the books of the seller.

16. Accounting for the HST Journal Entry for the Seller Dr A/R – ABC Bank 2,034 Cr Sales 1,800 Cr HST Payable 234

17. Accounting for the HST In the Books of the Purchaser • Sparkles Cleaners is not just the seller of services. • In some instances it is the purchasing company receiving the sales invoices of other companies. • In the hands of a purchaser, these are purchase invoices.

18. Accounting for the HST In the Books of the Purchaser • In order to recover the HST added by the seller, the purchaser must account for it.    • The purchase invoice is the source document for the transaction.

20. Accounting for the HST In the Books of the Purchaser (Sparkles Cleaners): Dr Office Supplies 600.00 Dr HST Recoverable78.00 Cr A/P – The Supply House 678.00

21. Remitting the HST • Most businesses are required to file monthly and must remit the net tax owed within one month following the end of their reporting period. • Refer to the example on the next slide:

22. Remitting the HST Calculate the difference: HST Payable – HST Recoverable $2,309.65 - $1,567.90 = $741.75 (owed to the government) Note: If this is a negativeamount, the company will receive a refund cheque from the Federal government.

23. Remitting the HST Make the Journal Entry Dr HST Payable 2 309.65 Cr HST Recoverable 1 567.90 Cr Bank 741.75

24. HST on the Balance Sheet • The smaller account balance is subtracted from the larger. • If the difference is a CREDIT, it is shown in the Liabilities section. • If the difference is a DEBIT, it may be shown in the Assets section. • However, most computer-generated balance sheets, will show a debit balance as a negative number in the liabilities section.

25. HST on the Balance Sheet