ACCT103: Bookkeeping and Tax

No reading in Carlon et al. (2022)

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 Introduction to NZ Taxation
• There are three main taxes that businesses have to
account for:
– GST (goods and services tax): This is a tax of 15% on
almost all goods and services.
– PAYE (pay-as-you-earn) tax: This is a tax on salaries and
wages of employees. The tax rate varies from 10.5% to
39%.
– Income and Provisional Tax: This is a tax of 28% on the
profit of businesses. It has to be paid in advance.
• There are a range of journal entries for these three
taxes.
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 GST
• GST (goods and services tax)
– Individuals or organisations have to register if they engages in a
“taxable activity” and have revenue of $60,000 or more.
– GST is 15% on almost all goods and services (i.e. expenses and
assets).
• To add GST: Price (excluding GST) x 1.15 = Price (including GST)
• To subtract GST: Price (including GST) / 1.15 = Price (excluding GST)
• To calculate GST: Price (including GST) x 3/23 = GST
– GST does not apply to salaries and wages, interest and
dividends.
– GST is recognised at the point of sale, irrespective of whether
cash is exchanged (i.e. accrual accounting).
– GST collected is a liability, while GST paid is an asset; balance (is
claimed from or paid to IRD (Inland Revenue Department) on a
monthly basis. 3
 GST
Goods Goods

Manufacturer Retailer Consumer

Price Price
(including (including
Consumers cannot
15% GST) 15% GST)
claim GST paid to
retailers from the
Pay Refund Pay Government

Refund

Businesses pay GST

received from customers
to the Government, but
Government they also can claim GST
paid to suppliers from
the Government 4
 GST Journal Entries
• GST
– Sale:
DR Bank or A/c receivable = Amount
CR Revenue = Amount / 1.15
CR GST clearing (liability) = Amount x 3/23
– Purchase of inventory or other assets:
DR Inventory = Amount / 1.15
DR GST clearing (asset) = Amount x 3/23
CR Bank or A/c payable = Amount
– Incurring expenses:
DR Expense = Amount / 1.15
DR GST clearing (asset) = Amount x 3/23
CR Bank or A/c payable = Amount
– Recognise GST payment to the Government (GST liability > GST asset):
DR GST clearing
CR Bank or A/c payable
– Recognise GST refund from the Government (GST liability < GST asset):
DR Bank or A/c receivable
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CR GST clearing
 GST Clearing Account – Ledger
GST Clearing No. 903
Date Particulars Debit Date Particulars Credit
A/c payable or bank A/c receivable or bank

GST asset from GST liability from

purchasing assets or revenue earned
incurring expenses

GST to pay if CR > DR

GST refund if DR > CR
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 Example 1: Journal Entries with GST
• Prepare journal entries for the following transactions:
– Sept 1: Services provided to clients of $15,686 (including GST) of
which $3,500 were on account.
– Sept 3: Received invoices from suppliers, totalling $10,557 (including
GST) of which $5,057 were paid in cash.
– Sept 5: $15,000 is paid to a finance company on a long-term loan;
this amount includes $5,125 of interest.
– Sept 10: A client paid their account of $3,750.
– Sept 12: Purchased new equipment for $54,625 (including GST);
$20,000 was paid and the remainder was a loan (i.e. a hire purchase
agreement).
– Sept 15: Paid $6,525 for last month’s GST owed.
• Prepare the GST clearing ledger account.
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 General Journal
Date Particulars Debit Credit
1/9/23

3/9/23

5/9/23

10/9/23
12/9/23

15/9/23

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GST Clearing No. 903
Date Particulars Debit Date Particulars Credit
3/9 1/9

12/9 1/9

15/9 15/9

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 PAYE
• PAYE (pay-as-you-earn) tax • Marginal rates:
– Collected and paid by – 10.5% on $0 to $14,000
employers on behalf of – 17.5% on $14,000 to
employees to IRD on a
monthly basis.
$48,000
– Journal entries – 30% on $48,000 to
DR Salaries and wages $70,000;
expense – 33% on $70,000 to
CR Bank $180,000
CR PAYE tax
payable – 39% on $180,000
DR PAYE tax payable upwards
CR Bank

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 Example 2: PAYE
• An employee is paid a salary of $100,000 per annum.
• Required:
– Calculate the amount of PAYE tax that the employee has to pay.

– Prepare the journal entry for a fortnightly payment of the

employee’s salary.

– Prepare the journal entry for a monthly payment of the PAYE tax,
assuming the employee has been paid twice in the month.

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s
 Example 3: Adjustments
• A Company has a weekly wages expense of $50,000 for full
time staff members, payable each Friday in arrears. The last
payday for the financial year ending 31 March falls on 25th
March. Assuming that the PAYE rate is 30%, provide
balance day adjustment to accrue four days of wages.

• Solution – Accrual for wages:

s
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 Income and Provisional Tax
• Income tax for companies is 28% of profits.
• Provisional income tax is an estimate of this year’s
income tax, based on last year’s income tax. Paid three
times per year to IRD.
– Paid in three equal instalments on 28 August, 15 January, 7
May.
• Companies have to file an income tax return once a
year; balance is claimed from or paid to IRD.
– A company with a balance date of 31 March has to file an
income tax return by 7 July and any outstanding income tax
(i.e. different between amount owed and provision income
tax paid) has to be paid by 31 December. 13
 Income and Provisional Tax

Accounting Period 1 Accounting Period 2

7 May 7 Jul 28 Aug 31 Dec 15 Jan 31 Mar 7 May 7 Jul 28 Aug 31 Dec 15 Jan

Recognise 1st payment of 2nd Recognise income 3rd Payment of

provisional tax provisional tax: payment tax expense: payment difference
payable: Journal entry of Journal entry of between
Journal entry DR Provisional provisional DR Income tax provisional provisional
DR Provisional tax tax payable tax expense tax tax and
expense CR Bank CR Provisional tax income tax
CR Provisional tax expense
payable CR Income tax
payable
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 Example 4: Income and Provisional Tax
• Assume provisional income tax is based on previous year’s income tax and that
the company tax rate of 28% has not changed in previous years. Provisional
income tax is paid in three equal instalments on 28 August, 15 January, and 7
May. A company with a balance date of 31 March has to file an income tax
return by 7 July and any outstanding income tax (i.e. difference between
amount owed and provision income tax paid) has to be paid by 31 December.
• The following information relates to ABC Company:
– Profit before tax was $1,800,000 for the year ended 31 March 2022.
– Profit before tax was $1,470,000 for the year ended 31 March 2023.
• This year’s the income tax expense is calculated and recognised on 31 March,
while next year’s provisional income tax expense is calculated and recognised
on 1 June.
• Required:
a. Calculate income tax expense for the years ended 31 March 2022 and 2023.
b. Calculate provisional income tax expense for 2023 and 2024.
c. Prepare the journal entries for all events relate to income tax and provisional
income tax from 1 June 2022 to 31 December 2023.
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a. Calculate income tax expense for the years ended 31 March 2022
and 2023.

b. Calculate provisional income tax expense for 2023 and 2024.

c. Prepare the journal entries for all events relate to income tax and
provisional income tax from 1 June 2022 to 31 December 2023.
Summary of events
1/6/22 Recognise provisional tax for 2022/23
28/8/22 1st instalment of 2022/23 provisional tax
31/12/22 Outstanding income tax payable to be paid Unknown
15/1/23 2nd instalment of 2022/23 provisional tax
31/3/23 Calculate income tax for 2023
Recognise income tax receivable
7/5/23 3rd instalment of 2022/23 provisional tax
1/6/23 Recognise provisional tax for 2023/24
28/8/23 1st instalment of 2023/24 provisional tax
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31/12/23 Claim income tax receivable
Journal entries
1/6/22

28/8/22

15/1/23

31/3/23

Note: There is also provisional tax payable of $168,000.

7/5/23

1/6/23

28/8/23

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31/12/23
 Summary of Learning
• You should be able to:
– Calculate GST, PAYE tax, provisional tax and
income tax.
– Prepare journal and ledger entries for GST, PAYE
tax, provisional tax and income tax.
• Note: GST is recognised when source
documents are issued or received. This means
there is no GST on balance day adjustments
(e.g. accrued revenue and expenses).
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