GST and the GST Clearing account (VCE Accounting Unit 3)
“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”
GST is collected from customers on sales and paid to suppliers on purchases; it is neither revenue nor an expense to the business, which acts as a collector for the Australian Taxation Office. GST on sales is credited and GST on purchases is debited to one GST Clearing account. A net credit is a current liability owed to the ATO; a net debit is a current asset refundable.
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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 GST Clearing account records the GST charged on sales (a liability building up because it is owed to the ATO) and the GST paid on purchases (which reduces that liability because it is offset against amounts owed). Its balance represents the net amount owing to or refundable from the ATO.
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).
A credit balance in GST Clearing means GST collected exceeded GST paid, so the business owes the ATO: report it as a current liability. A debit balance means GST paid exceeded GST collected, so the ATO owes the business: report it as a current asset.
Worked example
Transactions for the quarter
Credit sales of inventory 40,000 plus GST. Cash sales 10,000 plus GST. Credit purchases of inventory 25,000 plus GST. Cash purchase of a new shelving asset 5,000 plus GST.
GST on sales (credits)
Credit sales GST = 40,000 times 10 percent = 4,000. Cash sales GST = 10,000 times 10 percent = 1,000. Total credited to GST Clearing = 5,000.
GST on purchases (debits)
Inventory purchases GST = 25,000 times 10 percent = 2,500. Asset purchase GST = 5,000 times 10 percent = 500. Total debited to GST Clearing = 3,000.
Net balance
Credits 5,000 minus debits 3,000 = a net credit balance of 2,000. The business owes the ATO 2,000 dollars, reported as a current liability.
Settlement
Paying the ATO: Debit GST Clearing 2,000, Credit Bank 2,000. The account now has a nil balance, and the cash payment appears under operating activities in the Cash Flow Statement.
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.
Recording the full 44,000 dollars from a credit sale (including GST) as Sales overstates revenue and profit. Sales must be recorded GST exclusive at 40,000, with the 4,000 GST credited to GST Clearing. Likewise GST on purchases is not an expense; it is debited to GST Clearing, not to Inventory or any expense account.
Exam-style questions
Questions in the style of VCAA 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.
Practice3 marksA business made cash sales of inventory for $8 250 (including GST) and a credit purchase 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 = $750 credit minus $400 debit = a net credit of $350. The GST Clearing account moves $350 further toward a credit (liability) balance. Marks: $750 collected, $400 paid, and the net $350 credit identified.
Practice2 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.