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ExamExplained

GST and Source Documents (SACE Stage 2 Accounting)

Syllabus dot point

“Record the goods and services tax on sales and purchases using source documents and report the net GST liability”

6 min read

Quick answer

The goods and services tax is 10 percent. A business collects GST on its sales (GST collected, a liability) and pays GST on its purchases (GST paid, which reduces that liability). The net difference is owed to or refunded by the ATO. GST is never the business's revenue or expense; the business is only a collector.

Jump to a section
  1. What this dot point is asking
  2. GST and source documents
  3. Extracting GST from a total
  4. Recording GST in journals
  5. Source documents and the audit trail
  6. Reporting the net GST on the BAS
  7. Why GST is a balance sheet item
  8. Exam-style questions

What this dot point is asking

You need to identify GST on source documents, record the GST component separately in journals, and calculate the net GST payable to the ATO.

GST and source documents

A tax invoice is the source document that triggers GST recording. It shows the price, the GST, and the GST-inclusive total. For a GST-registered business, GST flows through balance sheet accounts, not the income statement.

GST collected and GST paid

GST collected is the 10 percent added to sales; it is a liability because the business owes it to the ATO. GST paid (an input tax credit) is the 10 percent on purchases and expenses; it reduces the amount owed to the ATO.

Extracting GST from a total

If a figure is GST-inclusive, the GST is one eleventh of it, because the total represents 110 percent.

GST from an inclusive amount

GST=GST-inclusive total×111\text{GST} = \text{GST-inclusive total} \times \frac{1}{11}

GST-exclusive price=GST-inclusive total×1011\text{GST-exclusive price} = \text{GST-inclusive total} \times \frac{10}{11}

Recording GST in journals

On a credit sale, the debtor is debited with the full inclusive amount; sales is credited with the price; GST collected is credited with the tax. On a credit purchase, the asset or expense is debited with the price, GST paid is debited with the tax, and the creditor is credited with the inclusive total.

Recording GST and finding the net

A month of trading

  1. Sells goods for $5,500 including GST. GST =5,500×111=500= 5{,}500 \times \frac{1}{11} = 500. Sales $5,000; GST collected $500. Dr Debtors $5,500; Cr Sales $5,000; Cr GST collected $500.

  2. Buys inventory for $2,200 including GST. GST =2,200×111=200= 2{,}200 \times \frac{1}{11} = 200. Dr Inventory $2,000; Dr GST paid $200; Cr Creditors $2,200.

  3. Pays $330 including GST for repairs. GST =330×111=30= 330 \times \frac{1}{11} = 30. Dr Repairs $300; Dr GST paid $30; Cr Cash $330.

Net GST payable to the ATO:

GST collected−GST paid=500−(200+30)=$270.\text{GST collected} - \text{GST paid} = 500 - (200 + 30) = \$270.

The business remits $270. Notice sales is recorded at $5,000 (not $5,500) and inventory at $2,000 (not $2,200): the GST never inflates revenue or cost.

Source documents and the audit trail

GST recording is only as reliable as the documents behind it, so SACE expects you to link each entry to its source document. The main documents are:

  • Tax invoice. Issued for sales of more than $82.50 (GST inclusive) and required before a buyer can claim an input tax credit. It must show the seller's ABN, the words "Tax invoice", the GST amount or a statement that the total includes GST, and the date and description.
  • Receipt. Evidence that cash has been received or paid; it triggers the cash journals.
  • Cheque butt or electronic remittance. Evidence of a payment made.
  • Credit note (adjustment note). Issued when goods are returned, reversing both the sale and the GST originally recorded.

Each document is the verifiable evidence that supports the journal entry, satisfying the qualitative characteristic of faithful representation: the figures can be checked back to an external record rather than relying on the bookkeeper's word. Keeping documents in date order builds the audit trail an external examiner or auditor follows from the financial statements back to the original transaction.

Reporting the net GST on the BAS

A registered business reports GST to the ATO on a Business Activity Statement (BAS), usually each quarter. The GST collected and GST paid accounts are netted off: when GST collected exceeds GST paid the business remits the difference; when GST paid exceeds GST collected (common when a business makes large capital purchases) the ATO refunds the difference. Settling the BAS clears the GST control accounts back toward zero, ready for the next period. This is why GST never touches the income statement: the whole cycle of collecting, paying and remitting moves only through asset, liability and cash accounts.

Why GST is a balance sheet item

Because the business merely collects GST for the government, it cannot be income, and the GST paid on purchases is recoverable, so it cannot be a cost. The net GST sits as a current liability (GST payable) when collected exceeds paid, or a current asset (GST refundable) when paid exceeds collected.

Common error

Recording sales and purchases at their GST-inclusive amounts. This overstates revenue and expenses and distorts the gross profit margin. Always strip the GST out: record sales and purchases at the GST-exclusive figure and post the tax to the separate GST account.

Exam-style questions

Questions in the style of SACE Board exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.

SACE 2022-style5 marks
During a BAS quarter a retailer made cash sales of $44 000 (GST inclusive), credit sales of $22 000 (GST inclusive), bought inventory on credit of $33 000 (GST inclusive) and paid $1 100 (GST inclusive) for electricity. Calculate the GST collected, the GST paid (input tax credits) and the net GST payable to or refundable from the ATO.
Show worked answer →

Strip the GST out of each inclusive figure using the one-eleventh rule.

GST collected: cash sales 44 000×111=4 00044\,000 \times \frac{1}{11} = 4\,000; credit sales 22 000×111=2 00022\,000 \times \frac{1}{11} = 2\,000. Total GST collected =6 000= 6\,000.

GST paid (input tax credits): inventory 33 000×111=3 00033\,000 \times \frac{1}{11} = 3\,000; electricity 1 100×111=1001\,100 \times \frac{1}{11} = 100. Total GST paid =3 100= 3\,100.

Net GST: 6 000−3 100=2 9006\,000 - 3\,100 = 2\,900 payable to the ATO. Because collected exceeds paid, the net is a liability (GST payable). Markers reward correct extraction of GST from inclusive totals, separating collected from paid, and the correct direction (payable, not refundable).

SACE 2020-style3 marks
A business issues a tax invoice for a credit sale with a GST-exclusive price of $1 800. Show the general journal entry to record the sale, and explain why GST collected is classified as a liability rather than revenue.
Show worked answer →

GST is 10 per cent of the exclusive price: 1 800×0.10=1801\,800 \times 0.10 = 180, so the inclusive total is 1 9801\,980.

Journal entry: debit Debtors 1 9801\,980; credit Sales 1 8001\,800; credit GST collected 180180. Debits equal credits.

Classification: the 180180 is collected on behalf of the ATO, not earned by the business. The business has a present obligation to remit it, so it meets the definition of a liability. Treating it as revenue would overstate income and the gross profit margin. Markers reward the correct three-line entry with GST separated and the liability reasoning.

Practise this

Sources & how we know this

Based on the official SACE Board subject outline. Not yet individually reviewed by a person; always check SACE Board and your school's materials for current rules.

ExamExplained