QuickBooks Discount item
One of my customers was asking me whether she can create a discount to a customer without associate it to a GST code of 7% GST.
This is an accounting question, as an accountant you should know the answer. If not, best person to ask is IRAS, not me. Here, I will just simply highlight the differences.
To a layman, if you create an invoice to your customer with $100.00 (before tax). The transaction will be debiting Accounts Receivable account $107.00 and crediting Sales $100.00 and Tax Payable $7.00 (based on 7% GST).
Journal:
DR. Accounts Receivable $107.00
CR. Sales $100.00
CR. Tax Payable $7.00
If you add a discount of $10 to this invoice and you do not wanted to charge a tax (GST) on this discount item. Then, the transaction will be debiting Account Receivable account $97.00, crediting Sales $100.00, debiting Sales Discount $10.00 and crediting Tax payable account $7.00.
Journal:
DR. Account Receivable $97.00
DR. Sales Discount $10.00
CR. Sales $100.00
CR. Tax Payable $7.00
Is this correct?
Now, look at this transaction if I were to include a tax (GST of 7% in the discount item). The double entry for this invoice will be debiting Accounts Receivable $96.30, crediting Sales $100.00, debiting Sales Discount $10 and crediting Tax Payable account $6.30 ($7 – $0.70).
Journal:
DR. Accounts Receivable $96.30
DR. Sales Discount $10.00
CR. Sales $100.00
CR. Tax Payable $6.30
To a customer, the 2nd method is more appropriate. He enjoyed a discount, so the amount of tax (GST) paid should be lesser. In accounting point of view, your sales was reduced ($100 – 10 = $90), so your tax (GST) should be 7% base on $90; that is $6.30 and not $7.00.
Unless your business are special that discount item do not charge GST, or else there should have a GST associated to the discount item. Do attend the GST training courses conducted by IRAS to get a better understanding on how GST affecting your business.