Example of Tax Recovery Distributions
Recoverable distributions are created when you save the line distribution. Simultaneously, tax recovery rates are calculated according to the Determine Recovery Rate tax rule process or the default recovery rate.
You can review tax distributions and, if applicable, update the tax recovery rate on a tax distribution.
Scenario
Your company is located in a Canadian province that applies a Harmonized Sales Tax (HST). HST is a combination of the provincial sales tax and the federal Goods and Services Tax (GST). They recently purchased books to sell in their stores. They also purchased some computers to use in kiosks within the stores for customers to use to locate books.
Transaction Details
Here are the transaction details:
-
Total cost of books is 10,000 CAD
The invoice indicates the intended use as Resale.
-
Total cost of computers is 5,000 CAD
The computers are expensed as they don't meet the capitalization threshold.
-
Tax rate applicable to each item is 13%
In most tax regimes, a registered establishment can reclaim 100% of taxes from the tax authority, except for specific designated purchases. Depending upon the details of a company's business purchases and tax authority regulations, a number of exception regulations may accompany the details of tax recovery. Tax implications are:
-
The HST associated with the cost of books to be sold in stores is 100% recoverable. Therefore, 1,300 CAD is recoverable (10,000 CAD * 13%).
-
The HST associated with the cost of the computers to be used in kiosks within the stores isn't recoverable. Therefore, 650 CAD is nonrecoverable (5,000 CAD * 13%).
The HST tax configuration specifies that the recovery tax rate for zero 0% recoverable is used as a default. A tax rule is defined to apply a 100% recoverable rate for products with an intended use of Resale.
Tax Recovery Distributions
Based on the analysis, the following distributions are created for the transaction:
|
Accounting Class |
Debit |
Credit |
|---|---|---|
|
Item Expense |
10,000 |
|
|
Item Expense |
5,000 |
|
|
Recoverable Tax |
1,300 |
|
|
Nonrecoverable Tax |
650 |
|
|
Liability |
10,000 |
|
|
Liability |
5,000 |
|
|
Liability |
1,300 |
|
|
Liability |
650 |