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Tax Considerations in Accounting for Inventory

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Confidential ACCPAC International

Tax Considerations in Accounting for Inventory

This section tells you how to account for the goods and services

tax (GST) and the provincial sales tax (PST), in the purchase and

sale of inventory.

Goods and Services Tax

In 1991, the Goods and Services Tax (GST) replaced the Federal

Sales Tax (FST). You should consult an accounting professional

and Revenue Canada for the latest GST information, and for

advice on the impact the tax will have on your particular

business.

The GST that you pay on purchases for use in your business or

for resale may qualify as an input tax credit. If it does, the GST

is not an expense or a cost of inventory. You account for it

separately and claim it back from the government.

When a company buys inventory, it pays GST (on GST-taxable

items). The seller can charge for the tax in one of two ways:

either included in the price of the item or excluded.

For example, if a company purchases an inventory item and

GST is included in the selling price, the invoice line looks like

this:

Widget 107.00 GST included

If the company purchases the same inventory item, but GST is

excluded from the selling price, the invoice looks like this:

Widget 100.00

GST 7.00

Total 107.00