The GST Clearing Account

What is GST?

• Goods and Services Tax (GST) is a 10% tax on most goods, services and other items sold or consumed in Australia.
• Businesses registered for GST are responsible for collecting GST on their sales (GST Collected) and can claim credits for the GST included in the price of their purchases (GST Paid).
• The difference between GST Collected and GST Paid is remitted to (paid to) or received from the Australian Taxation Office (ATO).

KEY TAKEAWAY: GST is a value-added tax; businesses collect it on behalf of the government.

The GST Clearing Account

• The GST Clearing account is a general ledger account used to record all GST transactions of a business.
• It tracks the amount of GST the business owes to the ATO (a liability) or is owed by the ATO (an asset).
• The GST Clearing account is a temporary account. It is cleared at the end of each Business Activity Statement (BAS) period.
• GST Clearing is classified as either a current asset or a current liability on the balance sheet.

VCAA FOCUS: Understanding the purpose of the GST Clearing account and its relationship to the ATO is crucial.

Role of the GST Clearing Account

1. Records GST on Transactions: Accurately records the GST component of all business transactions.
2. Tracks GST Liability/Asset: Shows the net amount of GST the business owes to or is owed by the ATO.
3. Facilitates BAS Preparation: Provides a summary of GST transactions for preparing the Business Activity Statement (BAS).
4. Ensures Compliance: Helps businesses comply with GST regulations.

EXAM TIP: Be prepared to explain the role of the GST Clearing account in the context of a trading business.

Structure of the GST Clearing Account

The GST Clearing account is a T-account with debit and credit sides:

REMEMBER: Debit = GST Paid; Credit = GST Collected. “Debits Decrease Liabilities”.

Recording GST Transactions

When recording transactions involving GST, the following principles apply:

1. Identify GST Component: Determine the amount of GST included in the transaction. GST is 1/11 of the selling price.
2. Double Entry Accounting: Use double-entry accounting to record the transaction.
3. GST Clearing Account: Use the GST Clearing account to record the GST component.

Examples of GST Transactions

1. Cash Purchase of Inventory

• A business purchases inventory for \$1,100 (including GST).
• The GST component is \$100 (\$1,100 / 11).

• The cost of the inventory (excluding GST) is \$1,000 (\$1,100 - \$100).

  General Journal Entry:

  Date	Account	Debit (\$)	Credit (\$)
  [Date]	Inventory	1,000
  	GST Clearing	100
  	Bank		1,100
  	Being cash purchase of inventory

2. Credit Sale

• A business sells goods on credit for \$660 (including GST).
• The GST component is \$60 (\$660 / 11).

• The sales revenue (excluding GST) is \$600 (\$660 - \$60).

  General Journal Entry:

  Date	Account	Debit (\$)	Credit (\$)
  [Date]	Accounts Receivable	660
  	Sales		600
  	GST Clearing		60
  	Being credit sale of goods

3. Payment to ATO

• A business pays \$500 to the ATO for GST owed.

  General Journal Entry:

  Date	Account	Debit (\$)	Credit (\$)
  [Date]	GST Clearing	500
  	Bank		500
  	Being payment of GST to ATO

STUDY HINT: Practice recording various GST transactions in the General Journal to reinforce your understanding.

Balancing the GST Clearing Account

• At the end of each reporting period (e.g., monthly or quarterly), the GST Clearing account must be balanced.
• The balance represents either:
  • GST Liability: If the credit side (GST Collected) is greater than the debit side (GST Paid). The business owes money to the ATO.
  • GST Asset: If the debit side (GST Paid) is greater than the credit side (GST Collected). The ATO owes money to the business.

Example: Balancing the GST Clearing Account

Assume the following transactions occurred during the month:

• GST Collected: \$2,000
• GST Paid: \$1,500

GST Clearing Account:

In this case, the GST Clearing account has a credit balance of \$500, indicating a GST liability.

COMMON MISTAKE: Forgetting to consider the opening balance of the GST Clearing account when balancing it.

Reporting the GST Clearing Account in the Balance Sheet

• The balance of the GST Clearing account is reported in the balance sheet as either a:
  • Current Liability: If the account has a credit balance (GST owing to the ATO).
  • Current Asset: If the account has a debit balance (GST owed by the ATO).

Example: Balance Sheet Presentation

Balance Sheet (Extract)

Current Liabilities

• Accounts Payable \$10,000
• GST Clearing \$500

OR

Current Assets

• Accounts Receivable \$8,000
• GST Clearing \$200

APPLICATION: Businesses use the GST Clearing account to accurately determine their GST obligations and ensure compliance with tax laws.

Factors Affecting the GST Clearing Account Balance

Several factors can influence whether a business has a GST liability or a GST asset:

• Sales Volume: Higher sales volume generally leads to a larger GST liability.
• Purchase Volume: Higher purchase volume generally leads to a larger GST asset.
• Capital Purchases: Significant capital purchases (e.g., equipment) can result in a GST asset in the short term.
• Timing of Sales and Purchases: Fluctuations in the timing of sales and purchases can affect the GST Clearing account balance.

VCAA FOCUS: Understand how different business activities impact the GST Clearing account balance and its presentation in the balance sheet.

Review Questions

1. Explain the purpose of the GST Clearing account and how it is used in accounting for GST.
2. Describe the difference between GST Collected and GST Paid, and how they affect the GST Clearing account.
3. Demonstrate how to record common GST transactions in the General Journal.
4. Explain how to balance the GST Clearing account and interpret the balance.
5. Describe how the GST Clearing account is reported in the balance sheet.