11 Part 2 PROCESSING TRANSACTIONS in GENERIC SOFTWARE 2.1 Getting Started Other manuals in this series have been written for specific accounting software, e.g. MYOB and QuickBooks. This manual is generic, and hopefully will be of use to bookkeepers who are using different software programs. This chapter will allow you to get an overview of the functions which you can expect your current accounting software to include, and ways in which these capabilities can be put to good use within your organisation. We recommend that you consult your software provider and any help facilities and manuals that you have available to you to assist you in these matters if you are unsure of how to logically proceed. If you re also new to bookkeeping in general, most of what you need to know will be covered in this part of the manual. 2.1.1.1 Loading the Software onto Your Computer Your accounting software will most probably arrive on a CDRom, unless you have downloaded it from the internet or purchased it on a set of floppy disks. You will need to follow the installation instructions carefully, and make sure that your computer has the correct system capabilities required by the software. You may also need to register or activate the software. Have your serial or other numbers ready, as well as whatever other information about your organisation is required. 2.1.1.2 Loading the Standard Chart of Accounts In this Generic Training Manual, as we don t know which software you are using, your next step will be to input the QUT developed Standard Chart of Accounts, account by account, into a data file created using your accounting software. It is recommended that a new organisation data file be created, rather than just rearranging an existing one. This Standard Chart of Accounts data file is available from the website shown below:, https://olt.qut.edu.au/bus/dyo For those who use MYOB or QuickBooks, the above website provides the Standard Chart of Accounts data file not only with the account names and numbers already entered, but it also contains the necessary links set up between accounts, and the correct preferences set so as to make the processing of transactions easier and more efficient. The data file also has all of the relevant tax codes pre-set. March 2006 2-1 Processing Transactions
22 Generic Manual: If you are using another accounting software package, there is another option: Follow the Chart of Accounts as shown in the Appendix of this manual, and carefully key in (as possible according to the constraints of your software) the account numbers, names and correct GST codes. It is quite likely that many of the account names will not be needed by your organisation you could create the accounts and not use them (although this may change in the future), or simply leave out the accounts you don t need. Be sure to set up the appropriate tax and account links where appropriate. Once you have created the Chart of Accounts in your accounting software, we can get started 2.1.2 Loading Opening Balances The very first thing that you need to do is enter your nonprofit organisation s information, including your organisation s name, address (either postal or street), the telephone and fax number, and any e-mail address. Also important is the organisation s ABN (Australian Business Number). The next step is to enter opening account balances that appear on your most recent set of financial statements as at financial year-end. These may or may not have been audited at the time of inputting. Should these opening balances change once the audit report has been signed, you may need to go back and revise these figures. It is quite possible that your software will only allow you to enter opening balances with respect to asset, liability and equity accounts. It may not possible to enter opening balances in respect of revenue and expense accounts. If this is the case, we strongly recommend that the transition to this new chart of accounts occurs on the first day of the new financial year for your organisation. Alternatively, if you choose to convert to the new QUT Chart of Accounts during your current financial year, you will need to re-enter all transactions that have occurred from the beginning of the financial year to this point. Be aware this will be very costly and time consuming. For more information on converting to the QUT Chart of Accounts during the financial year, refer to Section 2.1.2.2. 2.1.2.1 Conversion at the Beginning of the New Financial Year If you are choosing to convert to this Chart of Accounts at the start of your new financial year, you will first need to make sure that the data file is set up to start and end its reports for your particular financial year. We would recommend that although very little data has as yet been entered into your new data file, as a rule, ALWAYS do a backup before starting a new financial year, or a new payroll year. Once the correct start and end months for your financial year have been set, you will be able to enter your opening account balances. March 2006 2-2 Processing Transactions
33 Starting with your main bank accounts, enter the balances for each account that match what you are currently using. Refer to the Data Dictionary in Part One if you are unsure of any of the account definitions. TIP: Enter the balances only as positive numbers. Do not, for example, enter liability opening balances as negative numbers. Enter negative amounts only if the account truly has a negative balance (for example, Accumulated Depreciation). You will now be able to move on to the next step, that is, setting up GST codes. 2.1.2.2 Conversion during the Financial Year Alternatively, if you wish to convert to the new Chart of Accounts part way through the current financial year, you also need to re-enter all previous transactions that have occurred during the course of the year to this point. Be aware that this could be a lengthy and time consuming process be sure to take this into account if you decide to convert to this new Chart of Accounts during your financial year. For example, if you are adopting this Chart of Accounts on 1 November 2005, with a Financial Year that starts in May, you will need to enter the opening balances for assets, liabilities and equity as at 30 April 2005, as well as all the transactions that have occurred between 1 May 2005 and 1 November 2005. This will be the case only if your accounting software does not allow you to enter opening Revenue and Expense balances. In some instances, if you do not process many transactions per month, this may not be difficult, but obviously the larger the organisation, the more transactions, and for this reason, it is advisable to adopt the Chart of Accounts at the start of your new financial year. To convert during your current financial year, simply follow the steps outlined in the section above, and keep in mind that you will need to re-enter all previous transactions before you can enter your most current. 2.1.3 Setting up GST Tax Codes Before you begin to enter transactions, please be aware that there may be certain issues regarding the GST. There are some accounts where the tax codes vary between organisations. For example, most fundraising events are subject to GST. However, there is a special provision contained within the Goods and Services Tax Act (1999) as amended that allows for these events to be regarded as input-taxed (Section 40-160). If an organisation makes this election, the relevant revenue accounts should be coded INP. If you are uncertain as to the correct GST tax code to use, you should consult your accountant/auditor, or contact the Australian Taxation Office. March 2006 2-3 Processing Transactions
44 2.1.4 Linking Accounts It may be possible to link accounts within your software to either a function (determining where certain transaction processing will accrue for example, Payroll or GST Liabilities), or to a card (or whatever your software uses to store information about customers, suppliers and employees). A card can be defined as a mini-data file that stores relevant name, address and other details for each customer, supplier, organisation or employee that your organisation has, and will continue to have dealings with. Explore and make the most of these options if they exist. 2.1.5 Setting up Cards (Customers, Suppliers, Employees, etc). The next step is to begin to set up a catalogue of cards, for all of the customers, suppliers, and employees that your organisation may have. It may also be possible to have accounts linked to their use, to make the processing of transactions quicker and more efficient for example, a card set up for the electricity department can be linked to the relevant expense account ensuring that all electricity invoices get coded to the correct account each time. To properly set up a card, it is best to have available all the information relating to the company or individual at hand, but if you do not, it should be possible to go back into any card and edit the information as necessary. Based on the invoice example on the following page, the card should at least contain the following information: Correct name and address of the supplier; Other contact details that are available telephone, fax, mobile telephone numbers; Supplier s ABN; Any payment terms that have been agreed upon, and the correct name to put on cheque payments. A Customer card can be set up in a similar manner, reflecting all the information necessary to post invoices or contact the customer if this should need to happen. TIP: If a supplier is likely to also become a customer, create two cards, one listing him or her as a Supplier, the other as a Customer. March 2006 2-4 Processing Transactions
55 Bill s Repair Shop Pty Ltd Repair Shop to the Stars!! 27 January 2005 Invoice No: 3672 TAX INVOICE ABN: 13 789 987 997 Sample Nonprofit Organisation Inc. A Small Town in QLD The Main Street Somewhere, QLD, 4691. Being my professional fee for services rendered in respect of the following: Repairs to Gas Lift Office Chair AMOUNT OWING: $ 200.00 TOTAL FEE ABOVE INCLUDES GST OF: $ 18.18 Nett: Payment within 30 days from the date of this tax invoice. Bill s Repair Shop 33 Ashton Street, Somewhere QLD 4691 Telephone: (07) 3397 1983 Facsimile: (07) 3397 1982 March 2006 2-5 Processing Transactions
66 Before entering the card into the system, the Australian Business Number (ABN) also needs to be checked. The ABN is a unique 11-digit number, which must be displayed by the supplier on all invoices/tax invoices issued. If a supplier has not quoted their ABN on their invoice/tax invoice, you are required by law to withhold 48.5% of the total payment. You should also withhold payment if you think that the ABN quoted to you may be incorrect. If you are unsure, you can check the validity of an ABN by using the Australian Business Register website at: http://www.abr.business.gov.au. 2.2 Entering Transactions You are now ready to start entering transactions. These can be divided into a variety of categories, as detailed below: (a) Sales Sales involve all sales that the organisation makes to the general public, local businesses, and others. At the nonprofit organisation level, sales could involve the sale of specific medical equipment, or books and items of a similar nature, but could also include advertising space in the organisation newsletter, or client fees and charges. Your organisation should provide an invoice to the purchaser, as well as a receipt of some kind when payment is made. In the case of government grants, these should be entered as Sales in your software. Grants are normally subject to GST. Hence, 1/11 th of the gross amount of the grant needs to be remitted to the Australian Taxation Office on the Business Activity Statement. In some cases, the Government Department provides a tax invoice to the nonprofit organisation. This is referred to as a recipient created tax invoice. This means that the nonprofit organisation does not need to send the Government Department a tax invoice. If the Government Department does not issue the nonprofit organisation with a recipient created tax invoice, then the nonprofit organisation will be required to raise and send the Government Department a tax invoice for the GSTinclusive value of the grant received. Whichever way the tax invoice is achieved, it should still be entered into your software as a sale and coded to the relevant account (Account Numbers 4-1010 to 4-1000 in the Chart of Accounts). For more information on grants, refer to Section 3.1.1 of this manual. March 2006 2-6 Processing Transactions
77 (b) Purchases Purchases include all items which involve the organisation paying money and receiving in return an item, or a service. These should always be accompanied by an invoice (more about these later) which will require payment in the future, or a receipt, to show that the item was paid for at the time of purchase. For more information, see Section 2.2.3. (c) Banking Banking includes the depositing of all cash and cheques made out to the organisation on a regular basis (daily, weekly, or in extreme cases, monthly). Banking also includes the spending of money for which no invoice was provided, or the paying of superannuation and GST to the ATO, and bank reconciliations based on the weekly or monthly bank statement from the participating bank. For more information, see Section 2.2.5. (d) Payroll Payroll looks after all the transactions involved with paying of salaries and wages to all staff that have either a permanent or casual nature. Payroll also keeps track of superannuation owing, annual and sick leave accrued, and any leave of any nature taken during the year. Payroll also calculates the appropriate amount of PAYG tax to be withheld and paid to the ATO on the Business Activity Statement (BAS). For more information, see Section 2.5. 2.2.1 Entering Sales Transactions As previously mentioned, sales will include all goods and services, such as medical equipment, books, advertising space, etc, sold to a wide variety of members of the public and others. There are two ways to deal with sales. The first and preferable way is to issue a tax invoice from your organisation to the person or business to which the sale is being made. The tax invoice can probably be generated from within your software and printed onto the appropriate letterhead, or an invoice created in Word or similar document, the information of which is then recorded in your software an electronic copy of the paper. The other method to deal with these sales is simply to take the money collected, and enter it into your software using a banking - receive money facility. Depending on how the money is generated, both of these methods are appropriate. Generally speaking, street donation collections are simply cash hand overs, sometimes to be issued with a receipt. It is simply not appropriate to issue each of these with a tax invoice, and so using the Receive Money option is fine. However, for other sales, such as medical supplies, books or newsletter advertising, or when a local small business wants to put an advertisement in your organisation s newsletter, a tax invoice must be issued. March 2006 2-7 Processing Transactions
88 A tax invoice must have several items present to make it an acceptable and legal document. These are: the words Tax Invoice stated prominently; the organisation name or trading name, eg. ABC Limited; the organisation s ABN. This is vitally important; the name of the recipient of the invoice eg. DEF Pty Ltd; the address or ABN of the recipient; the date of issue of the invoice; a brief description of the goods or services provided; the amount payable for the supply and the amount of GST payable shown separately OR; an all-inclusive price with the statement that the total price includes GST. A dummy tax invoice was included at page 2-5 for you to use as a guide. You ll notice from your reading through the Data Dictionary that Sales generate income (revenue) and so will be using Account codes from the Income section, that is, Accounts starting at # 4-0000. Once monies have been received in payment of an invoice entered into your software, be sure to record the receipt in such a way as to ensure that the payment is linked to the relevant open invoice in this way, any Accounts Receivable account that has been set up will correctly reflect all outstanding amounts. 2.2.2 Entering Purchases and Expenses Purchases made by your organisation will involve payment of all expenses for which the organisation receives a tax invoice. It will also include the purchase of office and other equipment, renting of offices or equipment, purchases of services (such as gas, telephone, electricity etc) and expenses such as licenses, dues and subscriptions. Purchases also include one-off payments to volunteer staff or any expense they may have incurred, and other persons who perform a service on an irregular basis. All purchases will come with either an invoice or a tax invoice. An invoice is issued by an entity that is NOT registered for the GST, and a tax invoice is issued by an entity that is registered for the GST. Regardless of whether a supplier provides the organisation with an invoice or a tax invoice, it must still include the following details: an Australian Business Number (ABN); and an Invoice Number. The ABN is an eleven-digit number unique to the organisation. It is NOT the same as the Tax File Number (TFN) or Australian Company Number (ACN) in the case of companies. If the invoice or tax invoice does not have an ABN on it (and they can be hidden in very small writing, so spend a little time checking) then the organisation is required by law to withhold 48.5% of the gross amount, and remit this amount to the ATO on the next Business Activity Statement (BAS). This applies in all cases, unless: March 2006 2-8 Processing Transactions
99 payment is for salaries and wages (if this is the case, your software s Payroll should be handling this payment); payment is for less than $50; or payment is for an individual for a hobby, in which case you must acquire the appropriate approved declaration. A copy of this form has been included later in this manual. This could be a volunteer collecting money or working in the op shop, and being paid a fee of less than $50, or being reimbursed for travelling expenses or meals. Once you have established that the piece of paper in front of you is indeed an invoice or tax invoice that either requires payment, or has been paid, enter the invoice details into your software using the appropriate module and account and tax codes. For more information on valid tax invoices, refer to the following ATO weblink: Web link: http://www.ato.gov.au/content/downloads/gstnat12358022006.pdf If you have further purchases to enter, follow the same procedure until they are all entered. If the invoices have yet to be paid, put them aside, to be dealt with at a later date. If they have been paid, the payments need to be processed through your software, in the following manner. 2.2.3 Making Payments This next sequence of events assumes that the original tax invoice details have now been entered into your software. If they have not, do that now, and then proceed with these steps. Alternately, if you do not have the tax invoice, but have an idea of what the payment is for, use the Spend Money option. However, it is recommended that all efforts be made to obtain an invoice in the future, and enter the correct information. The Spend Money option is discussed at Section 2.2.5 Banking. Be sure to code the payment against the correct invoice this will ensure that your Accounts Payable account shows the correct running balance. The next requirement will be the cheque number used to pay the invoice. If paid by Direct Debit via the Internet, simply put EFT in the cheque number space, if this is possible. However, if paying by cheque, include the cheque number. The date of the payment is the date recorded on the cheque, cheque butt, or the date the internet transaction went though. If coding from a bank statement (in undesirable circumstances this is not best practice bookkeeping) put the date on which the cheque was cleared. The amount is the amount being paid at that time. Your software may accept a part payment the amount being paid should be credited against the total invoice amount. When the remaining monies outstanding are paid at a later date, only the amount still to be paid should show up. March 2006 2-9 Processing Transactions
1010 2.2.4 Banking Banking features will generally include all functions that apply to the management of your bank accounts and the money in and out. 2.2.4.1 Spend Money Perhaps the most used and potentially important feature of most accounting software, Spend Money (or Write cheque ) is used to record monies spent for which no tax invoice has been received by the organisation, or for automatic monthly payments that the bank has debited directly from the organisation s bank account. Bank and credit card fees can also be processed through here. Ideally, it is NOT for recording payments for which a tax invoice has been received. In this case, the tax invoice should have been entered into your software using the Purchases and Pay Bills options. If this section is not used, payments made by your organisation to a creditor (i.e. accounts payable) will not be reconciled against outstanding invoices, and will show up as still owing. To use this function, see Section 2.2.3 Making Payments. Providing these requirements have been satisfied, you may go ahead and Spend Money. If possible, enter the name of the person, group or entity to which the cheque or electronic payment is being made. Enter the cheque number, or if an electronic Internet Payment, simply put EFT. Add the date, amount paid, and any applicable note in the Memo field. Code the payment to the correct account code in most cases an expense will begin with 6-. Determine whether the amount being paid will have GST included in it, and code accordingly. For further instructions regarding the GST, see Section 2.4.6 Understanding GST Tax Codes. 2.2.4.2 Receive Money This function is used to record interest earned in a bank account or term deposit, refunds from the Australian Taxation Office, or deposits of money from the proceeds of a street donation occasion. Ideally, this is NOT for recording receipts for which a tax invoice has been issued by your organisation. If a tax invoice has been issued, the sale should have been entered into your software using the Sales, Receive Payments section. If this section is not used, amounts received by your organisation from a debtor (i.e. accounts receivable) will not be reconciled against outstanding invoices, and will show up as still owing. To use this function, see Section 2.2.2 Receipt of Monies. Enter the payer s name. If this is your organisation, because you are depositing street donations, you can create a card simply called Street Donations. Alternatively, you can leave this section blank, and fill in the details in a Memo area, if this is available. March 2006 2-10 Processing Transactions
1111 Next, enter the Amount Received, the Payment Method, and Date. Because this is revenue that is being received, the account code will begin with 4-. 2.2.4.3 Performing a Bank Reconciliation Bank reconciliations are legally required, and need to be done on a regular basis, as it is by means of a regular bank reconciliation that you are able to check that both the bank and your data file are showing the same, correct information. Ideally, a bank reconciliation should be performed on all cash accounts each time a bank statement arrives from the financial institution that your organisation deals with. Ideally, you should be receiving statements on a monthly basis, but more or less often is also possible. The accounts can usually be accessed through the Banking module in your software, where you will be able to choose the account you wish to reconcile. A dollar value may appear, called the New Statement Balance - this will almost certainly be different to that which has been calculated by your bank, simply because your software will be unaware of any bank fees and charges, interest earned or paid and automatic EFT payments that may have affected the bank account balance. Any Bank Statement Date that is required should be the closing date on your paper bank statement. Start at the top of your paper bank statement, and work down the list, one item at a time, ticking the matching dollar values off the paper copy at the same time as you check them off on your software reconciliation screen. As you work through, you will come across items that have for some reason not been entered, usually in the form of cheques made out in payment, bank fees and charges, or interest and other monies deposited. Cheques can be input in the usual way, through Purchases Pay Bills (see Section 2.2.4), or Banking Spend Money (See Section 2.2.5.1). Deposits can be input using either Sales Receive Money (See Section 2.2.2) or Banking Receive Money (See Section 2.2.5.2) Any interest earned or bank fees charged should be input using the Spend Money or Receive Money features of your software, dated the same as the date that they appeared on the bank statement. Hopefully, by the time you have worked through your bank statement, checking off everything both on the paper copy and in your software account, you will have balances that match. If not, there are a number of things to check. Make sure that the New Statement Balance is correct. Check that the Bank Statement date is correct make sure that it is the Closing Statement Date that you entered. Check also that all previous reconciliations have been completed. Check over the paper statement to make doubly sure that all figures are checked off. Lastly, go back through the information in your software, to make sure that all of them are correct. It is strongly advised that you get a report of all the transactions attach this report to your bank statement so that they do not get separated during filing. March 2006 2-11 Processing Transactions
1212 2.2.5 Debtors and Creditors 2.2.5.1 Debtors (Accounts Receivable) Analysis Debtors is the other name for Accounts Receivable. This represents all monies owed to your organisation by the public, businesses, etc. It is important to keep track of these amounts take action on any amounts that have been outstanding for more than 90 days. To see exactly who owes what, and how old the various accounts are, it is quite likely that you will be able to produce a report of these, based on information input at earlier times. This report is usually called an Accounts Receivable Ageing Summary (or Detail), or possibly a Debtors Ageing Summary (or Detail). 2.2.5.2 Creditors (Accounts Payable) Analysis Creditors is another name for Accounts Payable. This represents all monies that your organisation owes to suppliers, lenders and other businesses. It is important to keep track of these amounts action should be taken on anything that has been outstanding for more than 90 days, unless there is a very good reason that payment has not been made. To see exactly what is owing, and how old the various accounts may be, it is quite likely that your software can produce a report, based on information input at earlier times. This is usually called an Accounts Payable Ageing Summary (or Detail), or possibly a Creditors Ageing Summary (or Detail). 2.3 Reports 2.3.1 Preparing the Profit and Loss Statement The Profit and Loss Statement (also known as the Statement of Financial Performance ) reports your organisation s income and expenses for a specified period, with the option of choosing just one month, or several months at a time. It is a good idea to review this report regularly, to keep a track on how expenses and revenues are going. 2.3.2 Preparing the Balance Sheet The Balance Sheet (also known as the Statement of Financial Position ) reports your organisation s assets, liabilities and equity as at a certain date. Unlike the Profit and Loss Statement, in the case of the Balance Sheet, you can often choose only one month to view at a time however, the information is cumulative, so you should click on the latest month for which you have entered information. Like the Profit and Loss Statement, it is a good idea to review this report regularly, to make sure that accounts are reconciling correctly, that GST is accruing accurately, and that any liabilities are correct. March 2006 2-12 Processing Transactions
1313 2.3.3 Category, Job or Class Costing Reports Many organisations receive grants from various sources, many of which require regular acquittals as per the grant agreement put in place at the time. It may well be possible for your software to provide special reports which assign additional categories, classes or jobs to these specialised transactions. By coding each revenue and expense item to a particular job, class or category (i.e. grant), it is possible to keep a track of revenues and expenses pertaining to each grant. From there, it may well be possible to create specialised Profit and Loss Statements and Balance Sheet reports, highlighting each of the categories, jobs or classes used, and netting off the expenses against revenues. 2.3.4 Comparing Actuals to Budgets and Variance Analysis A very important feature of reporting is the preparation of an annual budget. It is strongly recommended that the organisation s treasurer assists in preparing the annual budget, as the budget will help guide the organisation as to what its established revenues and expenses are, and thus the final profit for the period. These budgets are usually prepared in Excel, presented to the Board of Directors, signed off, and then approved by the management committee. At the end of the Financial Year, the accountant or bookkeeper will enter actual figures for the Financial Year, and comparisons will be made to the budget. The comparison of budgeted figures to actual results is a key feature in evaluating the financial performance of the organisation, identifying the need for corrective action and preparing next period s budget. The comparison of actual to budgeted results is referred to as Performance Reporting. The difference between actual and budgeted figures is referred to as a variance. There are two types of variances: (a) (b) favourable (expressed as a F ); and unfavourable (expressed as a U ). In the case of revenues, a favourable variance is one in which actual revenue is greater than budgeted revenue. In the case of expenses, a favourable variance is one in which actual expenses are less than budgeted expenses. Conversely, an unfavourable variance is one in which actual revenue is less than budgeted revenue. In the case of expenses, an unfavourable variance is one in which actual expenses are more than budgeted expenses. Unfavourable variances are usually investigated to determine the cause and whether corrective action can be taken to improve the future performance. Managers will be asked to explain Why? and provide answers to these questions which may affect next period s budgeted figures. March 2006 2-13 Processing Transactions
1414 It is the responsibility of the management committee to investigate material (significant) variances to identify areas of concern and take corrective actions if necessary. Shown next is an example of this. The figures for the sample organisation for a particular month are now available, and have been added to the budget figures so as to prepare a Gross Profit Performance Report. Performance Report Actual Budget Variance Grants (State) 20,000 25,000 5,000 U Expenses: Accounting Fees 2,500 2,000 500 U Insurance - General 800 600 200 U Printing & Stationery 500 1,000 500 F Salaries & Wages 16,000 15,000 1,000 U 19,800 18,600 1,200 U Net Surplus $ 200 $ 6,400 $ 6,200 U By looking at this, it is possible to see that there was a degree of overspending in some areas, and as a consequence, the profit is lower than originally anticipated. Management will need to review these figures carefully to see what changes are necessary and possible. 2.3.5 Graphs, Charts and Tables Having created your various reports, it is possible to turn them into a variety of charts, graphs and tables to make it easier for all concerned to grasp the relevant details quickly and easily. To do this, you will need to send your software report to Excel, if this is possible, or simply re-create the report on an Excel spreadsheet, and manipulate it from there using Chart Wizard. With the Excel workbook open in front of you, click on the icon at the very top of the screen that looks like a small bar chart this will activate the Chart Wizard, allowing you to manipulate the information as required. The icon will look like this: March 2006 2-14 Processing Transactions
1515 This example shows the above report turned into two charts Performance Report - Expenses $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 Actual Budget $4,000 $2,000 $0 Accounting Fees Insurance - General Printing & Stationery Salaries & Wages Performance Report - Revenue $25,000 $20,000 $15,000 $10,000 Actual Budget $5,000 $0 1 Actual v Budget March 2006 2-15 Processing Transactions
1616 2.4 GST and Tax Invoices 2.4.1 Introduction to the GST The Goods and Services Tax (GST) commenced in Australia on 1 July 2000. The principal Act governing the operation of the GST is the Goods and Services Tax Act (1999) as amended. In addition to the Act, the Commissioner has issued a number of GST Rulings and GST Determinations outlining the Australian Taxation Office s interpretation of the legislation. The major principles of the GST are: the GST is a flat 10% broad-based tax on the private consumption of most goods and services in Australia; the tax is charged and collected by registered entities at each stage in the production chain; the GST is remitted by the registered entity to the ATO on a monthly or quarterly basis in a form entitled the Business Activity Statement ; each registered entity is entitled to claim a credit for any GST paid. This credit is known as an input tax credit ; and the tax is ultimately borne by the consumer. Each registered entity is required to remit the net amount of GST collected to the Australian Taxation Office each month or quarter via the Business Activity Statement (BAS). This process is illustrated in Diagram 1 on the following page. March 2006 2-16 Processing Transactions
1717 Diagram 1: How the GST Works Manufacturer makes and sells chocolate to a wholesaler for $100 + $10 GST = $110 GST payable $10 Less: input tax credit 0 Net amount owing $10 ATO receives $10 Wholesaler buys chocolate for $110. Pays $10 GST. Sells to retailer for $200 + $20 GST = $220 GST payable $20 Less: input tax credit (10) Net amount owing $10 ATO receives $10 Retailer buys chocolate for $220. Pays $20 GST. Sells to customer for $300 + $30 GST = $330 GST payable $30 Less: input tax credit (20) Net amount owing $10 ATO receives $10 = Customer pays $330 to the retailer to buy the chocolate. Pays $30 GST ATO receives $30 2.4.2 Types of Supplies There are three types of supplies for the purposes of the GST: (a) (b) (c) Taxable supplies; GST-free supplies; and Input taxed supplies. (a) Taxable Supplies Taxable supply is defined as the supply of goods, services, provision of advice or information, a grant, assignment or surrender of real property, a creation, grant, transfer, assignment, a financial supply and an entry into or release from, an obligation to do anything, to refrain from an act, or to tolerate an act or situation. March 2006 2-17 Processing Transactions
1818 Once a registered entity has made a taxable supply it is required to charge the 10% GST. The 10% GST is added to the value of the supply. Hence, if the value of the supply is $100, the 10% GST must be added, giving a total of $110. In Australia, all prices are required to be shown GST-inclusive. Hence, to calculate the amount of GST that has been included in the price, you divide by 11. Put another way, the GST payable on a taxable supply is 1 / 11 th of the price displayed. (b) GST-Free Supplies A GST-free supply is one which does not attract the 10% GST. In other words, it means that the supplier is not required to charge the 10% GST. However, the registered entity can still claim back input tax credits on the inputs used to produce the GST-free supply. This effectively results in no GST being collected on the supply of GST-free goods and services. Examples of GST-free supplies include: basic food; health; education; childcare; exports and other supplies for consumption outside Australia; religious services; non-commercial activities by charitable institutions; raffles and bingo conducted by charitable institutions; water and sewerage facilities; supplies of going concerns; transport and related matters; precious metals; supplies through inward duty free shops; grants of freehold and similar interests by governments; farm land; cars used by disabled persons; and international mail. When coding a GST-free supply in GENERIC, you should use the code FRE. If an organisation has a GST-free supply, it may still claim back input tax credits on the inputs used to produce the GST-free supply. This effectively results in no GST being collected on the supply of GST-free goods and services. For more information on the GST concessions provided to the non-commercial activities of charitable institutions, refer to the following ATO fact sheet. For information specific to residential rent, refer to Section 3.6. Web link: http://www.ato.gov.au/content/downloads/n7633.pdf March 2006 2-18 Processing Transactions
1919 (c) Input Taxed Supplies An input-taxed supply means that the registered entity (ie. the supplier) is not required to charge the 10% GST to the consumer. However, unlike a GST-free supply, the supplier is not able to claim an input tax credit on the inputs used to produce the inputtaxed supply. Examples of input-taxed supplies include: financial supplies (such as loans, bank charges, account keeping fees and interest); residential rent; residential premises; precious metals; and school tuckshops and canteens. When coding an input-taxed supply in GENERIC, you should use the code INP. A summary of the three types of GST supplies is shown in Table 1 below. Table 1: Summary of the 3 Types of GST Supplies Type of Supply Charge the 10% GST? Claim Back the Input Tax Credit? Taxable Yes Yes GST-Free No Yes Input-Taxed No No 2.4.3 Registration for the GST To be liable for GST or to claim input tax credits, an organisation must be registered. An entity is required to register for the GST if their annual turnover exceeds $50,000 per annum. In the case of nonprofit organisations, the registration threshold is set at $100,000 per year. An entity above these thresholds must register for the GST. However, an entity below these thresholds may voluntarily register for the GST. Entities may register by completing the appropriate form available from the ATO or by or registering on-line at http://www.abr.business.gov.au. When an entity registers for the GST, it will be issued with an Australian Business Number (ABN). The ABN is the same as the registration number for GST. 2.4.4 Attribution Basis (Cash v Accruals) There are two methods of accounting for the GST: cash method; and the non-cash method (the accruals method). March 2006 2-19 Processing Transactions
2020 An entity may elect to use the cash basis of accounting if one of the following conditions is met: its annual turnover is less than $1,000,000; it uses the cash basis for income tax purposes; the Commissioner determines that the enterprise can use the cash basis; or the entity is a charitable, gift-deductible entity or government school. Where an entity falls under one of the above conditions, it may elect to use either the cash or accruals basis of accounting. However, if an entity is not eligible to use the cash basis, it must use the accruals basis of accounting. Under the cash basis of accounting, the GST is payable in the tax period when the cash is received from the customer in respect of a taxable supply, not the date that the tax invoice is issued. An input tax credit for a creditable acquisition is claimed when the payment is made in cash, rather than the date that the tax invoice was issued. Under the accruals basis of accounting, GST is payable on a taxable supply in the tax period in which: the entity received consideration for the supply; or when the tax invoice is issued to a customer, whichever is the earlier. Similarly, under the accruals basis of accounting, an input tax credit can be claimed on a creditable acquisition in the tax period in which: the entity provided consideration for the goods or services; or when the tax invoice has been received, whichever is the earlier. An entity cannot claim an input tax credit unless it has a tax invoice for the purchase at the time of lodging the BAS. 2.4.5 Tax Periods (Monthly v Quarterly) A tax period is a period for which an entity calculates its GST and lodges its return (known as the Business Activity Statement). An entity has a choice of whether it wants to lodge monthly or quarterly Business Activity Statements (BAS). The quarterly tax periods end on 31 March, 30 June, 30 September and 31 December. The monthly tax period ends on the last day of each month. An entity is required to use a monthly tax period if the entity's annual turnover is $20 million or more or the entity has a history of failing to comply with tax obligations. When lodging its Business Activity Statement, the entity calculates the amount of GST payable in respect of taxable supplies charged to customers. It also calculates the amount of the GST paid (ie. input tax credits). March 2006 2-20 Processing Transactions
2121 The difference between these two amounts is referred to as the net amount. The registered entity must remit the net amount to the ATO on the Business Activity Statement. Conversely, where an entity determines a negative net amount, this signifies a refund that the ATO owes the entity. The ATO must process the refund within 14 days of receipt of the BAS. For quarterly lodgers, the Business Activity Statement must be lodged within 28 days of the end of the relevant tax period. For example, the BAS for 31 March 2004 is due by 28 April 2004. In the case of the 31 December 2003 BAS, the lodgment date is 28 February 2004 rather than 28 January 2004. In the case of monthly lodgers, the BAS must be lodged within 21 days of the end of the relevant tax period. 2.4.6 Understanding GST Tax Codes Although there are a variety of tax codes available, the frequently used ones are shown in the table below: Table 2: General Coding System General Code CAP FRE GNR GST INP N-T ABN Description of the General Code Capital acquisitions tax code used to record GST on assets purchased by the entity GST-Free used to record the entity s GST-free sales A supplier that is not registered for the GST GST tax code used to record revenue or expenses on which the entity has collected or paid GST (eg. telephone expense) Input-taxed used for bank charges and other financial supplies No tax not reported on the BAS used to record transactions outside the GST system, such as cash transfers and donations No ABN has been quoted on the invoice or tax invoice. Accordingly, the payer is required to deduct and remit 48.5% ABN withholding tax March 2006 2-21 Processing Transactions
2222 2.4.7 Tax Invoices A registered entity which makes a taxable supply and charges the GST is required to issue a tax invoice. A supplier must issue a tax invoice within 28 days of the date of sale, if requested, for all supplies with a GST exclusive price exceeding $50 (i.e. $55 inclusive of GST). The Commissioner takes the view that the $50 test should be applied to the total of the tax invoice and not the value of each separate item (see GST Ruling GSTR 2000/17). This GST Ruling can be found at the following address: Web link: http://law.ato.gov.au/pdf/gst00-17.pdf According to Section 29-70 of the GST Act, a tax invoice must include: the Australian Business Number (ABN) of the entity issuing it; the GST-inclusive price of the supply; the words "tax invoice" stated prominently; the date of issue of the tax invoice; the name of the supplier and the name of the recipient; the address or ABN of the recipient; a brief description of each thing supplied including the quantity; and be in a form approved by the Commissioner. The precise requirements vary according to whether the amount payable is less than $1,000. Where the GST payable on the tax invoice is exactly 1/11 th, the tax invoice may either show: the total price inclusive of GST, with a statement confirming that the total amount payable includes GST; the amount of the supply plus the GST separately disclosed. Where the GST is less than 1/11 th (ie. where the supply consists of a taxable supply and a GST-free supply) the amount of GST payable must be separately disclosed. 2.4.8 Preparing the Business Activity Statement The Business Activity Statement (BAS) is issued by the Australian Taxation Office. If your organisation has chosen a monthly tax period, this form will arrive every month. Conversely, if the organisation has chosen a quarterly tax period, the BAS will issue and arrive every 3 months. You should receive the BAS a week or so before the end of the relevant tax period. The BAS includes the amount of GST charged by your organisation (and subsequently) collected as well as the GST paid by your organisation on acquisitions. These two amounts are offset to be called the net amount. March 2006 2-22 Processing Transactions
2323 The BAS also includes information on PAYG withheld from salaries and wages for the relevant tax period and ABN Withholding tax where no ABN was quoted by the supplier. In the case of private sector entities, the BAS also requires payment of PAYG instalments. Essentially, this is a pre-payment of income tax for the current income year each quarter. A sample Business Activity Statement has been included later in this manual. 2.4.8.1 Setting up BAS Information Whilst your software may have a useful BAS function, you must still lodge the ATO s hard copy BAS. It is not permissible to print off a BAS generated by an accounting software package and send this to the ATO, as each BAS issued by the ATO has its own unique bar code. However, most software packages can replicate the BAS so that all you need to do is transcribe the figures from your software-created BAS to the ATO-issued BAS for lodgement. Before preparing the BAS, the following steps need to be taken: 1. All bank accounts must be reconciled. 2. Print the report called GST [Detail Cash] if this exists, assuming that your organisation is on the Cash method of accounting for GST purposes. (If your organisation is on the Accruals method of accounting for GST purposes, choose the GST [Detail Accruals] report instead.) This detail report will give you a listing of all transactions that have occurred for the relevant time period, generally grouped according to their tax code setting. For this reason, you will want to view all tax codes and GST both Collected and Paid (or Receivable and Payable the wording can differ from package to package). The dates must be set to show all activity for the quarter in question three months. Print the report that is generated, and check every entry to make sure that the correct tax codes have been used. When satisfied, use this information to either fill out your BAS, or to check the BAS information generated by your software package. TIP: Please note that gifts (donations) fall outside the scope of the GST Act. Hence, they should be coded to N-T or no-tax in your accounting package. Gifts (or donations) are not reported on the Business Activity Statement. Your BAS or GST worksheet will certainly contain at least some of the following listed areas use these definitions to help you to fill out the BAS satisfactorily. Ignore any fields that are not applicable. G1: Total Sales (including any GST) G1 is used to record the gross sales and any other income earned by your organisation. This figure includes any GST you have collected and includes any amounts shown at G2, G3 and G4. March 2006 2-23 Processing Transactions
2424 G2: Export Sales Export sales are not subject to GST, and should be shown here. G3: Other GST-Free Sales This field is used to record any sales that are GST-free. G4: Input Taxed Sales As previously mentioned, input taxed supplies include financial supplies such as bank fees, and residential rent and certain fundraising events conducted by charitable institutions. For more information on this, refer to Section 3.6 of this manual for further guidance. G5: G2 + G3 + G4 This field adds together G2, G3 and G4. G6: Total Sales Subject to GST [ie. G1 - G5] Your software should automatically calculate the total sales which have been subject to GST for the previous quarter. G6 equals G1 minus G5.(i.e. total sales exclusive of GST less sales not attracting GST) G7: Adjustments [if applicable] Adjustments may occur where there has been an overstatement or understatement of GST shown in a previous BAS. For example, you may have discovered that the GST was not declared in a previous BAS in respect of a grant. The amount of the GST collected relating to a previous quarter should be shown here. However, you should consult your accountant before including any amounts at G7. G8: Total Sales Subject to GST After Adjustments [ie. G6 + G7] This field adds together G6 and G7. G9: GST on Sales [G8 divided by eleven] At G9, if your software is able to do so, the amount of GST on sales will be automatically calculated. This will be 1/11 th of the sales for the quarter. G10: Capital Purchases [Including any GST] Next, we move on to G10 this field will show any Capital Purchases [Including any GST] these are any non-current assets purchased during the reporting period, and should have a GST code of CAP. G11: Non-Capital Purchases [Including any GST] Here, you will need to show all other purchases your organisation has made for the period including any that may have been GST FRE. March 2006 2-24 Processing Transactions