ANSWER ID:9287

Some businesses record transactions that include both income (4-xxxx) and expenses (6-xxxx) accounts. These transactions must be recorded in a specific way to ensure the tax collected and paid is reported correctly.

This support note outlines two methods for doing this.

Here's what we'll cover:

What kind of scenarios would require these transactions?

What are the implications of such transactions for GST reporting?

How can I account for transactions that include both income and expense accounts?

- Method 1 - Using a Contra account

- Method 2 - Using a tax code for negative amounts

What kind of scenarios would require these transactions?

For example, a business may sell goods through a distributor who charges a commission on each sale. In this case the business could record a sales invoice which includes a negative amount reflecting the commission that has been deducted from the sale amount. This would result in a sales invoice equal to the payment that has been received.

Some businesses also include income and expenses in the one transaction by using the Receive Money function and deduct an amount for the daily expenses.

What are the implications of such transactions for GST reporting?

In the sales commission example above, the negative commission expense will show incorrectly as Sales on the BAS. The net Sale Value and Tax Collected will show, but there will be no reference to the GST Paid on the expenses included in the sales. These need to be shown as a business acquisition at G11 on the BAS.

If you are using BASlink, the expenses and the tax that was paid must appear in the Purchase Value and Tax Paid columns, in order for BASlink to allocate the expenses to the correct GST fields in the BAS. Even if you are not using BASlink, you will still need to know the GST you have paid on all expenses.

The methods below describe how you can ensure that these types of transactions are reflected correctly in your BAS reporting.

How can I account for transactions that include both income and expense accounts?

Method 1 - Using a Contra account

Task 1 - Enter a Sale and Purchase for each amount

When dealing with situations where a customer is also a supplier and vice versa you need to set up both supplier and customer cards for the customer/supplier involved. In this way, the contra method can be used to account for the transactions including the GST. Using the commission example above, a sale would be entered for the amount of $5,000 as per normal with a tax code of GST.

Enter the purchase as per normal for the commission, using the GST tax code for each line item as shown below:

Having done this, the correct sales and purchases values will be recorded, as well as the correct tax amounts being apportioned to the tax collected and tax paid accounts.

Task 2 - Create a Contra Account

You will need to create a new asset account called Contra Cheque Account.

1. Go to the Accounts command centre and click Account List.
2. Select the Asset tab and click New.
3. Make sure you select Bank in the Account Type drop-down menu.
4. Give the account a unique number that suits your account list.
5. Name the account Contra Account, or similar.
6. Click OK. See our example below.
   

Task 3 - Use the Contra Account

Go to the Pay Bills window and pay for the $1000 of commission. Make sure that the Contra Account is selected in the Pay from Account field in the top left hand corner of the window.

Go to the Receive Payments window and record a payment for the $1000 of commission paid. Make sure that the cheque account in the top left hand corner of the screen is set to the Contra Account.

You should now be left with a zero balance in the Contra Account. You'll also find that the distributor's debt has been reduced by $1,000 and the remaining balance of $4000 of the invoice equals the remaining amount you expect your customer to pay you.

Method 2 - Using a tax code for negative amounts

Task 1 - Create the tax codes to be used for negative amounts

1. Go to the Lists menu and choose Tax Codes.
2. Click New and enter the Tax Code as NEG. Enter a Description for the tax code.
3. Set the Tax Type to Goods & Services Tax and set the Rate to 10%.
4. Select your linked accounts for Tax Collected and Tax Paid.
5. Click OK. See our example below.
   

When you use an expense account in the Receive Money or Sales windows with a negative amount, use the NEG tax code for those line items. For example, the business mentioned earlier would need to enter their sales invoice as shown below.

Task 2 - Link the tax code in BASlink

When linking your tax codes in BASlink, the system automatically detects if the NEG tax code has been used with a negative value in a sale, purchase, Receive Money or Spend Money transaction. When you click the Setup button next to G1 Total Sales, the NEG tax code will automatically appear as NEG(P) indicating it was used in a purchase or Spend Money transaction. Conversely, when you click the Setup button next to G11 the NEG tax code will appear as NEG(S) indicating it was used in a sale or Receive Money transaction.

Note: Do not select the NEG tax code. Select either the NEG(S) or NEG(P) tax code as appropriate.

Click OK. The correct amount will appear in the G11 field.

When you use an income account in the Spend Money or Purchases functions, use the NEG tax code for those line items.

For example, consider a builder who pays an advertising agency for services performed, but also deducts expenses incurred on the agency's behalf. The builder would make out the purchase order as below.

When linking your sales to BASlink, you need to link the NEG tax code to the G1 field (Total sales & income & other supplies) or other appropriate supplies you have made G fields on the BAS. In this way, your negative income will be reported accurately on your BAS.

When completing the Calculation Sheet of the BAS, click the Setup button for the G1 (or other) field and select the NEG(P) tax code. Note that the letter 'P' will be displayed in brackets (P) next to the tax code to indicate that this tax code was used in a purchase or Spend Money transaction.

Click OK. The correct amount will appear in the G1 (or other) field.