GST Audit Notice Transactions to Reduce Accounts Payable

SOLVED

I've searched for an answer to this query without success.  If someone can provide a link to an answer to the exact same questions, please do.  Otherwise perhaps someone can assist me with an answer.

My client received a notice that some of the GST claimed was not going to be refunded.

The GST return was for a previous year, so the GST balance is now in Accounts Payable, payable to "The Receiver General".

The balnce is negative because the total of GST paid on purchases was greater than the GST received on sales.

Let me use some round figures to explain what I'm trying to achieve:

Balance of Account Payable to (actually from) "The Receiver General" is -1,000.00 (negative);

Notice that the claim is being reduced by 200.00 to 800.00, and that interest of 30.00 will be paid to the client.

From other posts about this subject, it appears that I should generate a new invoice to "The Receiver General" with the following columns (note that I use 6-digit account numbers):

Item Description               Amount    Account

Assessment Reduction    200.00      <which account?>

GST Interest                     -30.00      4nnnnnn Interest Revenue

Which account should the reduction be allocated against?

I am aware that Accounts Payable is a liabilty account, and that the interest is treated as income, but I don't think that the GST claim reduction amount should be classed as income or an expense, I want to reduce the amount due from "The Receiver General".

So, my question is: Am I right in issuing an invoice for this, and if so, what account do I use for the reduction amount?

Parents
  • 0

    The account for the reduction should be allocated proportionately against the amounts on the original purchases.   i.e. if it was a single $20,000 asset purchase, the value of the asset should be debited the additional $1,000 as an adjustment.

    I would say that since it's in the Payables, there's no other way to do it, other than to record it as an invoice.

    If you are going to record this in the prior year, you could just open those transactions and adjust them, removing the GST from the items that were disallowed, and put a note into the invoice screen as to which ITCs were disallowed, and why.   Then add a charge of $30 to the GST payable account in an Accounts Payable invoice.

  • 0 in reply to RandyW

    Thanks for the reply.

    I presume that you meant to debit the asset by $200, rather than $1,000?

  • 0 in reply to Stu McKenzie

    I meant that if you had recorded purchase of, for instance, a vehicle that in total was $21,000 including $1,000 for the GST, and the $1,000 GST was disallowed  (for instance, you are only able claim the portion of GST that relates to the CCA on the business portion every year)

    Then, the vehicle really has a 'book' cost of $21,000 rather than $20,000, so you need to debit the asset by the $1000.00 and credit GST paid.

  • 0 in reply to RandyW

    Clear, thanks.

    It may not be possible to process this notice simply, but If the GST was disallowed against fuel purchases, can I simply use the Owner's Capital (Retained Earnings) account in the invoice for the reduction?

    The fuel expenses are history now (actually 2011).

  • 0 in reply to Stu McKenzie

    Yes, if the reason they were disallowed was that the purchases weren't for business purposes, or weren't for that particular business.

  • 0 in reply to RandyW
    SUGGESTED

    The entry should look like:

    Item Description               Amount    Account

    Assessment Reduction   CR 200.00      GST paid

    GST Interest                     -30.00      4nnnnnn Interest Revenue

    Offset GST paid -against (reason for disallow)

    it will NOT be against retained earnings

    it is entered according to date of assessment and not for period assessedt

    it would be added to (Debit) fuel expense,

    if expense also disallowed,then after GST is added to expense, credit the expense incl GST against

    whose ever income (debit -wages paid) it would have been, or the owner can refund the money to business.

    I assume you know what to offset the interest income against. AR or Bank.

  • 0 in reply to JSB

    I apologise, but I don't understand your suggested answer.  No GST payments were made because a GST refund was claimed in 2011.  I am planning on posting this transaction on the assessment date (this year).  The fuel expense was also in 2011.

    I'm trying to find a very simple way to move forward with this reduced payment.  I must admit that RandyW's last reply seems to be the answer.

  • 0 in reply to Stu McKenzie

    I assume you have a general GST/HST balance account, as well as two detail GST/HST accounts, one for the amounts collected, the other for amounts paid. something like this:

    The  GST/HST Balance account (a general account) 2nnnn0

    The GST input tax credit, is on your books as GST paid in a detail account 2nnnn1

    The GST/HST collected is on your books as GST Collected in a detail account  2nnnn2

    Since the amount that was originally entered there, is showing a balance, now disallowed, it needs to be credited back, for the balance to be reduced. A credit to GST paid account is a reduction of an amount previously entered as paid.

    If when submitting GST return, your balances reported for period are, say like this:

    GST Balance  DR 1000.00

    GST Paid         DR 4500.00

    GST Collected                          CR 3500.00

    Upon Assessment $200.00 of the GST paid (input tax credit claimed) was disallowed, you need to reduce the balance in your GST paid account by that amount - CR 200.00. (also $30.00 interest was paid)

    To record your return/assessment Your complete Journal entry should look like this:

    GST Paid                                   CR 4300.00  amount allowed

    GST Paid                                   CR    200.00 amount disallowed

    GST Collected DR  3500.00

    Bank                  DR    830.00  (refund  and interest deposit)

    Interest Income                        CR      30.00

    Fuel expense   DR    200.00 (assuming expense is ok, - say fuel out of country)

    That clears your GST Balance relative to the return/assessment, and records your interest income. Naturally since GST accounts are floating balances, and many other entries since, the current balances will be whatever they are.

    If your accounts are not setup like that - they should be. Alternately you will have to tell us how they are set up.

  • 0 in reply to JSB

    Thanks for the detailed description, but you seem to think that GST has been paid this year.

    I tried to explain in my last reply that this is an adjustment to a previous year's GST return.

    Please re-read the initial post.  No GST has been paid.  A refund was claimed in 2011 and the amount is now in AP (as a negative amount) due from "The Receiver General".

    Here we are in 2014, and my scenario is exactly as described in the initial post.

    I thought that I had the solution worked out in my discussions with RandyW, but JSB, you seem to be trying to resolve figures in my present GST accounts.  Would you please review all of theprevious postings, and either agree with RandyW, or suggest another way of adjusting the AP account.

    P.S.: I do have GST Paid, GST Collected, and GST Balance accounts for the current year, which I believe should not be affected by adjustments to previous years.  Your last suggestion seems to want to process the GST adjustment this year, which would be likely to cause further grief with the CRA.

  • 0 in reply to Stu McKenzie

    Ok,

    So if I understand you correctly, the GST return was entered when it was submitted, and the balance payable/receivable moved to another AP account - AP Receiver.

    If when submitting GST return, your balances reported for period are, say like this:

    GST Balance  DR 1000.00        (not an entry- but balance)

    GST Paid         DR 4500.00

    GST Collected                          CR 3500.00

    If that is the case, then your original GST return entry would have looked like this:

    AP Receiver     DR 1000.00

    GST Paid                                   CR 4500.00

    GST Collected DR 3500.00

    Upon Assessment $200.00 of the GST paid (input tax credit claimed) was disallowed, you need to reduce the balance in your AP Receiver account by that amount - CR 200.00. (also $30.00 interest was paid)

    To record your return assessment Your complete Journal entry should look like this:

    AP Receiver                              CR    200.00 amount disallowed

    AP Receiver                              CR    800.00  (refund )

    Bank                   DR 830.00

    Interest Income                        CR    30.00

    Fuel expense   DR  200.00 (assuming expense is ok, - say fuel out of country)

    Hope this helps

  • 0 in reply to JSB

    Thanks for the revised advice, which helps greatly.

    One other factor that may not have been clear is that only a "Notice that the claim is being reduced by 200.00 to 800.00, and that interest of 30.00 will be paid to the client.".  i.e. No payment has been received yet.

    It seems that I can generate exactly the required journal entries using my original method, using the fuel account that you suggested:

    I generated a new invoice to "The Receiver General" with the following columns (note that I use 6-digit account numbers):

    Item Description               Amount    Account

    Assessment Reduction    200.00      5nnnnnn Fuel costs

    GST Interest                     -30.00      4nnnnnn Interest Revenue

    This generated the following journal entries which match your suggestion:

    5nnnnn Fuel costs          DR 200.00

    2nnnnn AP Receiver                          CR 170.00

    4nnnnn Interest income                     CR   30.00

    When the $800.00 payment is received, it will be used to clear both of the AP Receiver invoices.

    I do believe that either using an invoice, or entering journal entries, provides a satisfactory way to handle this issue.  Thanks again.

  • 0 in reply to Stu McKenzie

    Sorry, $830.00 is expected from the Receiver (not $800).

  • 0 in reply to Stu McKenzie
    verified answer

    Yes, that will work,

    It leaves $830.00 in AP Receiver which will be Credited when you receive the cheque.

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