ACCOUNTING
PRINCIPLES
Third Canadian Edition
Appendix B
SALES TAX
Types Of Sales Taxes
• Goods and Services Tax (GST)
• Provincial Sales Tax (PST)
• Harmonized Sales Tax (HST)
Goods and Services Tax (GST)
• A federal sales tax on most goods and services
provided in Canada
• A business, called a registrant, must register for
GST if it:
– provides taxable goods or services
– has revenues of more then $30,000 in any year
• Although registrants pay GST themselves, they
can claim an input tax credit (ITC) against the
GST they collect from customers
• GST is remitted to the Receiver General
GST Categories of Goods and
Services:
• Taxable supplies, where a rate of 7% is
applied, such as building materials,
convenience foods, and clothing
• Zero-rated supplies, subject to GST at 0%,
such as basic groceries and prescription
drugs
• Exempt supplies, not subject to GST, such
as education, health-care, and financial
services
Provincial Sales Tax (PST)
• Charged on retail sales of certain goods and
services and applied to the selling price before GST
(except in Quebec and PEI)
• Companies that apply for PST exemption numbers
are not charged PST on goods purchased for
resale
• Taxes are remitted to the provincial Minister of
Finance or Treasurer
• In Quebec and PEI, the PST is cascaded (i.e.
applied to the total of the selling price plus GST)
• PST rates vary by province and may not be applied
at the same rate to all taxable goods and services
• Certain goods are exempt, such as personal
services, children’s clothing, and books
Harmonized Sales Tax (HST)
• In Newfoundland, Labrador, Nova Scotia, and
New Brunswick, GST and PST have been
combined into the Harmonized Sales Tax (HST)
• HST is a combined rate of 15% on the selling
price
• HST returns are submitted quarterly or monthly to
the federal government, which then gives the
provinces their portions
Sales Taxes Collected on Receipts
• Sales taxes collected by a business is not a
source of revenue for the company
• Sales tax is collected on behalf of the federal
and provincial governments
• Sales tax collected is a current liability to the
company until remitted to the government at
regular intervals
Tax on Services
General Journal
Date Account Title and Explanation
May 28 Accounts Receivable
Legal Fees Earned
GST Payable ($500 x 7%)
To record revenue earned on
legal fees.
Ref
Debit
535.00
J1
Credit
500.00
35.00
Entry made to record the billing of a client for $500 of
services provided. In Ontario, legal services are exempt
from PST, so only 7% GST is charged. Note revenue is
recorded at $500, not $535. GST is recorded as a
current liability.
Tax on Services
General Journal
Date Account Title and Explanation
Jul 24 Cash
Cleaning Services Revenue
PST Payable ($250 x 6%)
GST Payable ($250 x 7%)
To record revenue earned on
cleaning services.
Ref
Debit
282.50
J1
Credit
250.00
15.00
17.50
Cleaning services provided by a company in
Saskatchewan for cash. These services are subject to
both PST (6%) and GST (7%). Both the PST and GST
are recorded as current liabilities.
Tax on Services
General Journal
Date Account Title and Explanation
Jul 24 Cash
Cleaning Services Revenue
HST Payable ($250 x 15%)
To record revenue earned on
cleaning services.
Ref
Debit
287.50
J1
Credit
250.00
37.50
Cleaning services provided for cash in New
Brunswick, where the HST is 15%. Note that the
HST is recorded as a current liability.
Tax on Goods – Sales
General Journal
Date Account Title and Explanation Ref
May 20 Accounts Receivable
Sales
GST Payable ($1,000 x 7%)
PST Payable ($1,000 x 8%)
To record sale of office
furniture on account.
20 Cost of Goods Sold
Merchandise Inventory
To record cost of merchandise
sold.
Debit
1,150.00
J1
Credit
1,000.00
70.00
80.00
800.00
800.00
Sale of $1,000 of office furniture, on credit, in Ontario (PST 8%,
GST 7%). The company uses the perpetual inventory system and
the cost of the goods is $800. Under the periodic inventory
system the second entry would not be recorded.
Tax on Goods – Returns
General Journal
Date Account Title and Explanation Ref
May 25 Sales Returns and Allowances
GST Payable ($300 x 7%)
PST Payable ($300 x 8%)
Accounts Receivable
To record return of goods
25 Merchandise Inventory
Cost of Goods Sold
To record cost of merchandise
returned.
Debit
300.00
21.00
24.00
J1
Credit
345.00
240.00
240.00
A $300 sales return and allowance granted on May 25 for returned
merchandise on the previous furniture sale. GST and PST payable
accounts are debited to indicate the return of a previously collected
sales tax. Under the periodic inventory system, the second entry
would not be recorded.
Sales Taxes Paid on Disbursements
Purchase of Merchandise for Resale
• PST is a single-stage tax collected from final
consumers of taxable goods and services
• Businesses with a registration number purchase
merchandise for resale exempt of PST
• GST charged on the purchase of merchandise for
resale is offset against any GST collected; GST paid
is consequently not part of the inventory cost of
merchandise purchased
• The GST paid on purchases is debited to an
account called GST Recoverable and is called an
input tax credit
Purchases
General Journal
Date Account Title and Explanation Ref
May 4 Merchandise Inventory
GST Recoverable ($4,000 x 7%)
Accounts Payable
To record goods purchased on
account.
Debit
4,000.00
280.00
J1
Credit
4,280.00
Entry to record the purchase of goods for resale at a price of
$4,000, on account, using a perpetual inventory system.
The GST is recorded as a receivable using the account GST
Recoverable. Under the periodic inventory system, the
$4,000 debit would be to Purchases.
Purchase Returns and Allowances
Date Account Title and Explanation Ref
May 8 Accounts Payable
GST Recoverable ($300 x 7%)
Merchandise Inventory
To record the return of goods.
Debit
321.00
Credit
21.00
300.00
A $300 return of merchandise on May 8. Note that the GST
Recoverable account is credited instead of the PST Payable
account because this is a return of previously recorded GST.
Under the periodic system, the credit of $300 would have
been recorded to the Purchase Returns and Allowances
account.
Operating Expenses
Purchase of Goods for Use
• When taxable goods and services are used in the
operation of a business, the PST forms part of the
asset or expense that is being acquired
• GST charged on the purchase of goods for use in a
business is recoverable and can be offset as an
input tax credit against GST collected
Operating Expenses
Date Account Title and Explanation Ref
May 18 Office Supplies ($200 + $16 PST)
GST Recoverable ($200 x 7%)
Cash
To record purchase of office
supplies.
Debit
216.00
14.00
Credit
230.00
This entry is for a purchase of office supplies for $200 cash
in Ontario (PST 8%, GST 7%). The cost of the supplies
includes both the supplies and the PST. Because GST is
recoverable, it does not form part of the asset cost but is
debited to the GST Recoverable account.
Operating Expenses
Date Account Title and Explanation Ref
May 18 Office Supplies ($200 + $21.40 PST)
GST Recoverable ($200 x 7%)
Cash
To record purchase of office
supplies.
Debit
221.40
14.00
Credit
235.40
The same purchase recorded in Prince Edward Island (GST
7%, PST charged on GST at 10%). Note that the provincial
sales tax base includes both the cost of the item and the
GST. Hence, PST is determined by multiplying 10% by $214
($200 + GST of $14). Because GST is recoverable it does
not form part of the asset cost.
Operating Expenses
Date Account Title and Explanation
May 18 Office Supplies
HST Recoverable ($200 x 15%)
Cash
To record purchase of office
supplies.
Ref
Debit
200.00
30.00
Credit
230.00
HST is treated the same as GST. HST is recoverable
and does not form part of the cost of the item
purchased. In Newfoundland and Labrador the HST
would be debited to a HST Recoverable account.
Property, Plant, and Equipment
Date Account Title and Explanation
May 20 Office Furniture ($1,000 + $80 PST)
GST Recoverable ($1,000 x 7%)
Accounts Payable
To record purchase of office
furniture.
Ref
Debit
1,080.00
70.00
Credit
1,150.00
PST and GST applies to all purchases of property, plant,
and equipment. All GST (and HST) paid is recoverable and
not part of the cost of the asset. The PST is part of the cost
of the asset. This entry is for the purchase of office
equipment, on account, for $1,000 in Ontario (PST 8%,
GST 7%).
Property, Plant, and Equipment
Date Account Title and Explanation Ref
May 20 Office Furniture ($1,000 + $$107 PST)
GST Recoverable ($1,000 x 7%)
Accounts Payable
To record purchase of office
furniture.
Debit
1,107.00
70.00
Credit
1,177.00
The same purchase of office equipment, on account, for
$1,000 in Prince Edward Island, where GST is 7% and PST
is charged on GST at 10%. Note that PST on $1,070 ($1,000
+ $70 GST).
Property, Plant, and Equipment
Date Account Title and Explanation
May 20 Office Furniture ($1,000)
HST Recoverable ($1,000 x 15%)
Accounts Payable
To record purchase of office
furniture.
Ref
Debit
1,107.00
150.00
Credit
1,150.00
The same purchase of office equipment, on account, for
$1,000 in Nova Scotia, where HST is 15%. HST is fully
recoverable and therefore does not form part of the cost of
that item purchased.
Remittance Of Sales Taxes
• Businesses collect taxes on behalf of the
government when the sale occurs and
periodically remit them to the appropriate
government agency
• GST and HST remittances are reduced by
claiming input tax credits
GST/HST
Date Account Title and Explanation Ref
Jun 30 GST Payable
GST Recoverable
Cash
To record remittance to CCRA
for GST
Debit
6,250.00
Credit
2,500.00
3,750.00
When remitting GST (or HST), the amount of GST payable is
reduced by any amount in the GST Recoverable account.
The GST owing is credited to cash. GST (HST) is remitted at
specific dates, depending on the volume of sales. If GST
recoverable exceeds GST payable a refund is receivable and
a debit to cash would be recorded.
PST
Date Account Title and Explanation Ref
Jun 30 PST Payable
Cash
To record remittance to CCRA
for GST
Debit
7,400.00
Credit
7,400.00
Remittance of PST to the Treasurer or Minister of Finance of
the applicable province or territory is for the balance in the
PST Payable account.
CONCLUSION
• Sales tax law is intricate and has added
complexity to the accounting of transactions
which flow through today’s businesses
• Before recording sales tax transactions it is
important to understand all of the relevant sales
tax regulations
• Check the federal and provincial laws in your
jurisdiction.
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