How is the Goods and Services Tax recorded through the GST Clearing account and reported as a current asset or current liability?
Recording the Goods and Services Tax on sales and purchases using the GST Clearing account and reporting the GST balance as a current liability owed to or a current asset receivable from the Australian Taxation Office
A focused VCE Accounting Unit 3 Area of Study 1 answer on the Goods and Services Tax. Explains why GST is neither revenue nor expense, records GST collected on sales and paid on purchases through the GST Clearing account, settles with the ATO, and reports the net balance correctly with reconciled figures.
Reviewed by: AI editorial process; not yet individually human-reviewed
Have a quick question? Jump to the Q&A page
Jump to a section
What this dot point is asking
VCAA wants you to record GST on sales and purchases through the GST Clearing account, settle the balance with the ATO, and report the net balance as a current liability or current asset. You must explain why GST never touches profit.
Why GST is not revenue or expense
The business collects GST on behalf of the government. The 10 percent added to a sale is never the business's income, and the 10 percent paid on a purchase is never the business's expense. Both flow through GST Clearing, leaving profit unaffected.
Recording GST
- Cash or credit sale: Credit GST Clearing with 10 percent of the selling price (it increases what the business owes the ATO).
- Cash or credit purchase of inventory or an asset: Debit GST Clearing with 10 percent of the cost (it reduces what the business owes the ATO).
- Settlement: when the GST return is lodged, the business pays the ATO (Debit GST Clearing, Credit Bank) or receives a refund (Debit Bank, Credit GST Clearing).
Worked example
Extracting GST from tax-inclusive amounts
Source documents and exam scenarios often quote a single tax-inclusive total rather than the GST-exclusive price plus separate GST. Because GST is 10 percent of the GST-exclusive price, a tax-inclusive total is 110 percent of that price. To recover the components:
- GST-exclusive price = tax-inclusive total divided by 1.1
- GST = tax-inclusive total divided by 11
For example, a tax invoice for 1,100 dollars including GST splits into 1,000 dollars of inventory (or sales) and 100 dollars of GST. Getting this split right matters because Sales and Inventory must always be recorded GST exclusive, while the GST portion is the only amount that touches the GST Clearing account.
GST on the Cash Flow Statement
GST does not appear in the Income Statement at all, but the cash movements connected to it do appear in the Cash Flow Statement. The GST received as part of cash sales, the GST paid as part of cash purchases, and the periodic settlement paid to (or refund received from) the ATO are all operating cash flows. This is one more reason the GST Clearing balance is a working-capital item: it is a short-term amount that will be settled in cash with the tax authority.
Why this matters
GST appears on almost every transaction in the exam, so getting the side right keeps every entry balanced. Reporting the balance correctly affects the classified Balance Sheet and the liquidity indicators. Because GST never affects profit, students who route it through Sales or an expense account misstate the Income Statement.
Exam-style practice questions
Practice questions written in the style of VCAA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
VCAA 20223 marksA business made cash sales of inventory for 4 400 (including GST) during March. Calculate the GST collected and the GST paid, and determine the resulting movement in the GST Clearing account, stating which side it affects.Show worked answer →
Strip the GST out of each tax-inclusive amount by dividing by 11.
GST collected on sales = 8 250 / 11 = $750, which is credited to GST Clearing (it increases what is owed to the ATO).
GST paid on the purchase = 4 400 / 11 = $400, which is debited to GST Clearing (it reduces what is owed).
Net movement = 400 debit = a net credit of 350 further toward a credit (liability) balance. Marks: 400 paid, and the net $350 credit identified.
VCAA 20232 marksAt 30 June the GST Clearing account had a debit balance of $1 200. Explain how this balance should be reported in the Balance Sheet and what the balance represents.Show worked answer →
A debit balance in GST Clearing means GST paid on purchases exceeded GST collected on sales.
Because more GST was paid to suppliers than was collected from customers, the Australian Taxation Office owes the business a refund of $1 200.
An amount receivable from the ATO is an asset, so it is reported as a current asset (GST refund due) in the Balance Sheet, expected to be received within twelve months. Marks: identify it as a current asset, and explain it is a refund owed by the ATO.