Purchase Trade Taxes

American users should read the next section on purchase trade taxes in the United States. Other users should skip the section on the United States and go directly to the introduction to purchase trade taxes.

Purchase Trade Taxes in the United States

Purchase trade taxes in the United States are very simple and do not require the employment of NewViews purchase trade tax features as described elsewhere in this section.

The only thing that American users might want to do when setting up for purchases is to delete the tax columns from their purchase invoices. This is optional, and may be done for the sole purpose of avoiding possible confusion and to make the invoices as simple as possible. You can enter purchases without deleting the tax columns and the taxes will simply be zero.

To delete the tax columns from purchase invoices follow these steps:

1. Position on purchases as shown in the screen below.

   In the explorer in the left pane click on any purchases journal as shown. In the right pane click on the Transactions tab and pick Basic Columns. In the bottom right pane click on the Details tab.

   

2. Delete the tax columns from the invoices in the upper right pane.

   There are two tax columns: Tax 1 and Tax 2. Position on each and press <Ctrl+Del> to delete each column. You are prompted for confirmation.

3. Delete the tax columns from the invoice details in the bottom right pane.

   There are two tax columns: Tax 1 and Tax 2. Position on each and press <Ctrl+Del> to delete each column. You are prompted for confirmation.

4. Delete the Item Total column from the invoice details in the bottom right pane.

   The purchase invoice details are set up in NewViews to display the total for each line item, which is generally the sum of the net amount, i.e. the Amount column, and the taxes. Since the taxes are not charged there is no point in displaying the item total, which will always equal the net amount anyway. So we simply delete this column along with the tax columns. Position on the Item Total column and press <Ctrl+Del> to delete it. You are prompted for confirmation.

This completes the setup for purchase trade taxes in the United States. You may skip the remainder of this section unless you want to review purchase trade tax functionality for general knowledge.

Introduction to Purchase Trade Taxes

NewViews provides for two different purchase trade taxes called Tax1 and Tax2. In Canada, Tax1 is commonly used for the goods and services value added tax (GST/HST), and Tax2 is used for provincial sales tax (PST). For current rates see Provincial Sales Tax Rates.

You set several fields to configure whether Tax1 or Tax2 are enabled, and if so, what rates are used, what accounts are posted to, and so on. Many of these settings can be overridden on a vendor-by-vendor or product-by-product basis and trade taxes can be configured to handle any situation you are likely to encounter. You can also configure purchase invoices to display column titles that are more meaningful than the defaults, i.e. Tax1 and Tax2.

You should configure trade tax settings before you start adding purchase invoices to your set of books. As you add line items to purchase invoices, NewViews automatically calculates trade taxes and extends invoice line items with the calculated amounts. The taxes can be configured to be included in expense or product costs, or to be posted to separate specified accounts such as a GST/HST refund or expense account.

The invoices that you will enter to record purchases were originally created by your vendors and therefore you have no control over how they calculate taxes or other amounts, or which amounts they actually display on the invoices. Therefore, the amounts calculated by NewViews must be viewed as the best estimate that NewViews can make under the circumstances. In most cases this greatly reduces data entry but in the those special cases that inevitably arise, you can always edit the amounts on the invoice to force compliance with the amounts on the invoice received from the vendor.

Several fields control whether Tax1 or Tax2 are enabled, and if so, what rates are used, what accounts are posted to, and so on. The calculation of sales trade taxes is described below and the fields that control the calculations should be filled in before you start adding purchase invoices to your set of books.

Calculation of Purchase Trade Taxes

A good understanding of how purchase invoices use trade tax settings can help you decide how to configure them. A purchase invoice can obtain purchase trade tax information from four places: the purchase invoice journal, the inventory/expense account, the vendor account, and finally, the user, who can enter tax amounts directly to handle special cases.

You should configure the journal settings to handle the most common case, and often this is all you need set up. But for certain vendors and/or products, settings can be overridden on the vendor or inventory/expense account. As a final resort, the user can override the tax amount on the invoice line item to handle those really special cases that inevitably arise.

The sources of trade tax information are listed below from lowest to highest priority.

1. Purchase Invoice Journal

   It is a good practice to specify all settings for the most common case on the root sales journal. Set the Description to something more descriptive than "Tax1" or "Tax2", because the description you enter will appear on invoices. Set Vendor Charges to yes and the Item Status to taxable. Set the Rate to the most common case such as 5 for GST, and for Ontario, 8 for PST. Set the Refund/Rebate account to /ACCOUNT/GENERAL/GST-IN for GST and leave it empty for PST. When empty, the tax is added to the net amount and posted with it to the inventory/expense account, which is what you want for PST. Set the Rebate Percent to 100 and Is Compounded to no. We will explain these fields later.

   This is often enough to complete the setup for purchase trade taxes. Below we describe how the values set here can be overridden on a vendor-by-vendor and/or product-by-product basis.

2. Expense Account or Inventory Account

   When adding purchase invoices, you select either an inventory account or an expense account for the item being purchased on each invoice line item. Each inventory/expense account has status, rate, and payable account settings that can be used to override the same values found on the journal as described above. For example, a tax might not be charged for certain products or services, and in this case you can set the tax status to exempt on the inventory or expense account.

   When a tax setting is filled in on both the journal and the inventory/expense account, the inventory/expense account setting has higher priority, and is said to override the journal setting.

3. Vendor Account

   When adding purchase invoices, one of the first things you do is to select a vendor account. Each tax on each vendor account has a setting: Tax Is Charged, and if it is set to no then the tax is not charged for that vendor. The vendor account has higher priority than the journal. For example, although a tax might usually be charged, a particular vendor may be located in another jurisdiction where the tax does not apply.

4. User input

   A user who is entering purchase invoices can override the calculated tax by simply entering the tax amount. Purchase invoices are created by the vendor so it is likely that small discrepancies between calculated amounts and the amounts on vendor-generated invoices will occur on a regular basis. The ability to edit the amounts is essential in these cases, and the automatic calculation of purchase trade taxes should be viewed as merely a data entry convenience.

   There are two methods when overriding either of the tax amounts to zero.

   • Overriding the calculated tax value with delete will adjust the amount and retain the item total.
   • Overriding the calculated tax value with 0 (zero) will retain the amount and adjust the item total.

Additional Points For Your Information:

• What happens when settings are empty, i.e. not specified?

  If Tax is Charged is empty on both vendor account and journal, then no tax is charged. If tax status is empty both inventory/expense account and journal, then no tax is charged. If tax rate is empty on both inventory/expense account and journal, then no tax is charged. If payable account is empty on both inventory/expense account and journal, then an error message is generated if a non-zero tax is calculated. If is compounded is empty on the journal, then the tax is not compounded.

• Zero is not the same as empty.

  For example, if a tax rate on an inventory/expense account is zero then the calculated tax will be zero. On the other hand, if the inventory/expense account tax rate had instead been empty, then the journal tax rate would have been used.

• You can change the tax settings at any time.

  You are not locked into the current settings. You can change any trade tax setting at any time to change basic rates, change tax exempt status, and so on.

• New tax settings do not affect existing invoices.

  When you change tax settings, existing invoices are not affected, but new invoices will use the new settings.

• Adding invoices before configuring trade tax settings.

  It may not be necessary to set up tax information before entering purchases.

  Although you can enter tax amounts manually on purchase invoices, you cannot pick a tax refund/expense account. Be aware that if the refund/expense account has not been set on the journal or inventory/expense account, then the tax will be added to the net amounts an posted with it to the inventory/expense account as part of the cost.

  The tax calculations are ultimately best estimates in any case, so the ability to manually override and enter tax amounts is always available. However, if you spend a few moments configuring the tax settings, your efforts will be amply rewarded in saved keystrokes in the weeks and months to come.

Refund/Expense Account

In Canada, the Refund/Expense account is the account that accumulates the surplus/deficit of refundable GST/HST spent on purchases and collected on sales.

Suppose we use the settings shown on the purchase invoice journal example. Tax1 is used for GST/HST and the Refund/Expense account is /ACCOUNT/GENERAL/GST-IN. Suppose we make a $100.00 purchase and select an inventory account. Assuming the vendor and inventory accounts both specify that GST/HST, i.e. Tax1, should be charged, the GST is calculated at $6.00. The inventory account is debited by $100.00 and /ACCOUNT/GENERAL/GST-IN is debited by $6.00. This same account, /ACCOUNT/GENERAL/GST-IN, will commonly be credited by sales invoices and its balance is what is owed to the government if it is a net credit, or what is expected as a refund, if it is a net debit. That is why it is referred to as the Refund/Expense account.

If the Refund/Expense account is empty, i.e. unspecified, then the tax is instead posted to the expense or inventory account. So in the example above there would be two postings to the inventory account, one for $100.00 and one for $6.00.

Rebate Percent

Earlier we just set this field to 100 but there are cases where another value should be entered. For example, if your organization is a Canadian municipality, university, school, or hospital, then you will be refunded a fraction of the GST/HST paid on their purchases, typically 50 percent. In that case, on a $100.00 purchase where $6.00 or GST/HST was paid, $3.00 will be added to the amount posted to the inventory/expense account, and $3.00 will be posted to the specified Refund/Expense account.

One versus Two Inventory/Expense Postings

As mentioned earlier, when the Refund/Expense account is not specified, any non-zero tax is posted to the inventory/expense account. The purchase invoice item will add two postings to the inventory/expense account: one for $100.00, the net purchase, and one for $6.00, the GST/HST paid. In this case the GST/HST paid is considered to be part of the cost of the inventory and yet it is posted in a separate amount and you can therefore identify the net and tax components of the purchase.

However, for whatever reason, instead of two postings, you might prefer a single posting for $106.00 on the inventory/expense account. To accomplish this, set the Rebate Percent to zero on the purchase journal, and leave the refund/expense account empty. With those settings, the $6.00 tax will be calculated and shown in a separate column on the purchase invoice and yet there will be a single $106.00 posting on the inventory/expense account.

Compounded Rates

Tax2 can be compounded on Tax1. This is controlled by the Is Compounded field in the purchase journal's tax settings for Tax2.

When Tax2 is compounded, it means that Tax1 is added to the invoice amount before the Tax2 rate is applied to the total. Although this may appear unusual to many, jurisdictions do exist where compounded trade taxes are in use. For example, in the provinces of Quebec and PEI, GST (goods and services tax) is added before applying QST (Quebec sales tax). Therefore, in Quebec Tax1 must be used for GST and Tax2 for QST.

Inheritance and Tax Settings

NewViews arranges objects in a hierarchy and many fields use this hierarchy to inherit default values from objects above in the hierarchy. This inheritance can help to simply setting up trade taxes in NewViews, (and setting up many other areas of NewViews).

For example, in examples in this section of the manual, we configure the trade tax settings on the root purchase journal. The purchase invoice journal and the purchase order journal are both below the root purchase journal and therefore they automatically inherit the settings we configured. Any or all values can be overridden on the purchase invoice and order journals, although this is rarely necessary.

A another example, consider the Is Charged setting. Suppose you go to /ACCOUNT/AP, i.e. the root accounts payable account, and set Is Charged for Tax1 to yes. Then by default, Tax1 will be charged for all sub-accounts of AP. The sub-accounts of AP are the vendors, so by setting the field in one place, you have set it for all vendors. Note however, if you want all vendors to be charged a tax then just leave the /ACCOUNT/AP Is Charged field empty so the journal settings will be used, and set up the journal to charge the tax.

And in any case, although settings on /ACCOUNT/AP are inherited by vendors, you can set the Is Charged field in individual vendors as well, thus overriding the default value inherited from accounts above or from the journal, on a case-by-case basis.

The inheritance just described for vendor accounts applies similarly to all of the tax settings fields on inventory/expense accounts and journals. Suppose you set the tax status, rate, and payable account for /ACCOUNT/EXPENSE, i.e. the root expense account. Then all expense accounts for all goods and services will use those values unless otherwise overridden.