1. Using Financials for Asia/Pacific
  2. Identify Tax Liability and Prepaid Tax Asset on Advance Receipt

Identify Tax Liability and Prepaid Tax Asset on Advance Receipt

You must identify the tax liability and prepaid tax assets on advance receipts.

Follow these steps:
  1. Create Sales Order.
    An Order to Cash process starts with the creation of the order in the Order Management application. In the given case study, VISION CORPORATION creates the sales order against FIRST SOFTWARE for the order amount of $9600. The transaction taxes, based on the tax determinants displayed on the Sales Order UI are 9% GST1 and 9% GST2, which is equivalent to GST1 $864 and GST2 $864. No accounting entries are generated at this stage. No tax reporting happens at this stage.
  2. Create Unapplied Advance Receipt in Receivables.
    Create an unapplied receipt for any advance amount received from the customer. An unapplied receipt means that the payment was received from the customer but is yet to be offset against a transaction. In the given case study, FIRST SOFTWARE pays $2400 as advance to VISION CORPORATION and manually creates an unapplied receipt in Receivables. In order to create unapplied receipt, receipt method is mandatory attribute. The prerequisite steps is to enable Advance Receipt feature for the Receivables Receipt class. Receipt classes to determine the required processing steps for receipts to which you assign receipt methods. Follow these steps:
    1. Navigate to Manage Receipt Classes and Methods.
    2. Search for the receipt class.
    3. For the header level Advance Receipt GDF segment, select Yes.
    4. Create an unapplied receipt by using a Receipt method, which belongs to a receipt class with the Advance Receipt GDF segment, select Yes.
    5. Run the Create Accounting process to create these entries:

      Create Accounting Process Entries

      Particulars Dr. Amount Cr. Amount
      Dr. Bank Account 2400.00
      Cr. To unapplied cash 2400.00
  3. Once the unapplied receipt is accounted, navigate to the Manage Tax on Advance Receipt page to create tax lines on the advance receipt. Follow these steps:
    1. In the Tools work area, navigate to the Security console.
    2. Create a role with the Manage Advance Receipt Tax for India privilege.
    3. Assign the role to the user account used for creating advance receipts.
    4. Run the User and Roles Synchronization process to avoid problems with roles or privileges.
  4. Navigate to Manage Tax on Advance Receipts. Follow these steps:
    1. Sign in as Receivables Manager.
    2. Navigate to Receipts Workbench, Task Pane, and Manage Tax on Advance Receipt.
      The list of values displays only those receipts that meet these criteria:
      • The receipt method belongs to a receipt class with the Advance Receipt GDF attribute as Yes.
      • The customer for the receipt must not be null.
      • The receipt amount entered must be equal to the unapplied amount.
      • The receipt is accounted successfully.

      These fields are displayed from the receipt number in non-editable mode, by default:

      • Business Unit
      • Receipt Method
      • Receipt Number
      • Customer Account
      • Customer Name
      • Customer Site
      • Receipt Date
      • Currency
      • Entered Amount
      • Total Applied Amount
      • Unapplied Amount
  5. The default first-party and third-party tax registration numbers are displayed in the Manage Tax on Advance Receipt page.
  6. You can enter the First and Third Party Tax Registration Numbers, which are defaulted based on certain conditions.
    A tax registration number contains information related to a party's transaction tax obligation with a tax authority for a tax jurisdiction where it conducts business.

    The First-Party Tax Registration Number is retrieved from the Main Legal Reporting Unit (LRU) associated with the Legal Entity. If no registration record is found for the main LRU, then the registration record retrieved from the LRU associated to the Ship-from location is set as default.

    The Third-Party Tax Registration Number is retrieved from customer Bill-To site.

    In the Source Document Number field, select the sales order number created earlier. Once you provide the source document number, the values for these fields are populated automatically:

    • Item
    • Item Description
    • UOM
    • Quantity
    • Unit Price
    • Line Amount
    • Source Line Amount
    • Source Document Number
    • Source Document Line Number
    • Bill-to Location
    • Tax Classification
    • Transaction Business Category
    • Document Fiscal Classification
    • Intended Use
    • Product Fiscal Classification
    • Product Category
    • Product Type
    • User-Defined Fiscal Classification
    • Assessable Value
    Note: If required, you can update the automatically populated values.
  7. Click Save to initiate the tax calculation and calculate the tax based on tax determinants from the selected sales order. If required, you can review and edit the tax.
    This table shows the tax lines are created:

    Tax Lines Created During Tax Calculation

    Tax Line Rate Name Rate Tax Amount Tax Regime Tax Name Tax Status
    1 GST1_9 9 216.00 GST GST1 Standard
    2 GST1_9 9 216.00 GST GST1 Standard
  8. Click Complete to initiate the ESS job to create accounting entries.
  9. Follow these steps to complete the prerequisite setup:
    1. Sign in as Tax Manager.
    2. In the Setup and Maintenance work area, go to Offering: Financials.
    3. Functional Area: Transaction Tax Task: Manage Taxes.
    4. On the Manage Taxes page, go to the Tax Accounts tab.
    5. Enter account code combination for Tax Pre Paid Account. The same combination is considered for tax rate and tax jurisdiction level. These account code combinations are available:
      • Tax Prepaid Account

        This code combination is debited for recognizing the prepaid tax on advance receipt and the same combination is credited when offset of prepaid tax balance happens.

      • Tax Liability Account

        This code combination is mandatory in the Regime to Rate configuration and is credited for tax lines created on Receivables transaction.

  10. Accounting entry to recognize prepaid tax on advance receipts:
    This table shows the account entries generated:

    Generation of Account Entries

    Particulars Dr. Amount Cr. Amount
    Dr. GST1 Pre Paid Account 216.00
    Dr. GST2 Pre Paid Account 216.00
    Cr. GST1 Liability 216.00
    Cr. GST2 Liability 216.00