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Can you kindly explain me how to calculate net tax for purchases inclusive of tax. i got stuck in practice question no. 3
John Moffat says
But I explain how to calculate it in the lecture!
Sir you explained about the sales inclusive tax,that how shall we calculate it but purchases inclusive tax i am not able to do it. i am stuck in question 3 in the practice exam.
It is exactly the same for purchases as it is for sales. So for question 3 the tax is 17.5/117.5 x 590,790
Right. Thank you sir. Sorry it was my calculation mistake. 🙂
You are welcome 🙂
Sales Tax Account is treated as an Expense or a Liability?
It is a liability if we owe sales tax to the state; it is an asset if the state owes sales tax back to us.
I’m using the March/June 2016 notes and there is no mention of discounts (the notes end after example 4) Am I correct in assuming that I need not know that for the June ’16 exam, and therefore ok if I skip that part of the lecture?
Thank you and excellent lecture!
Yes – skip that part of the lecture.
(Discounts on their own are examinable and are covered in the lectures on control accounts, but don’t worry about the effect on sales tax)
sir sorry to be asking alot of question
if the sales tax account show an opening credit balance of 4540 at the beginning of the month and a closing debit balance 2720 at the end of the month do we net it off
An opening credit balance at the start of the month means that they started the month owing money to the state.
During the month they will have collect tax (meaning more owing to the state) and will have suffered tax (meaning less owing to the state).
The balance at the end of the month is the net of these figures and is the amount owing to or from the state at the end of the month.
so sir if i am correct when drawing up this month t account is it ok for me to put it the debit 2720 and credit 4540 respectively and then continue with the other transaction and then balance it off
i was working a question and they put both th c/d and b/d on the same side
The balance at the end of the period could be on either side depending on whether they owed money to the state or whether the state owed money to them. The balance is simply the missing figure on the account to make it balance.
I do suggest that you watch the earlier lectures on double entry bookkeeping,
In future you must ask questions like this in the Ask the Tutor Forum and not as a comment on a lecture.
sir if i am correct for this syllabus the discount part is not necessary
I don’t think it is (because it is a tax rule rather than an accounting rule). However, Kaplan does think it can be asked!
So to be safe I have left it in the lecture.
Test question 2, why is maintenance cost not cpaitalised as a non-curretn asset? is it charged elsewhere?
It is not a necessary cost to install the machine. It will be a cost every year and it will be charged as an expense in the Statemt of profit or loss
Test question 2. I don’t understand why 5% settlement is being added. How do I also know if the sales tax has been included in the list price of goods for sale.like in this example.
This question is a little bit unfair (and I will remove it in the next edition).
However the tax rule is that the sales tax is calculated subtracting all discounts. The settlement discount is only given if the customer pays within whatever time limit we give (which is why the full amount is show as receivable until we find out if they pay on time or not) but the sales tax is always calculated assuming that they will take the discount.
Again, because that is a tax rule (and this is not a tax exam) it is a bit unfair which is why I will remove this question.
Sir, it is not very clear from tax point of view: Normally we should charge 18% tax on the sale=960*18%=172.8, but we charge less(164.16). In my country this would be tax calculation error and imply tax penalties. Tax is always calculated as a fixed percentage on the amount you declare as a sale. You cannot declare a certain amount, and then calculate 18% on a different amount.. Second: What if customer fails to pay in advance: It would imply that our tax is lower than it should have been: our sales amount is 960, tax 18% should be applied on this amount. Are you sure sales tax must not be recalculated in this case?
Yes, I am 100% sure! It is the tax rule in the UK.
However you will have noticed that the example is not any longer in the Lecture Notes (which I assume you have downloaded because otherwise there is no point in watching the lectures). I am going to remove the lecture as well because (as I wrote in response to an earlier question below, it would now be unfair for it to be asked in F3 since it is a tax rule rather that an accounting rule.
For your information. The tax authorities do not have a problem with this for two reasons – firstly such discounts are usually only given from business to business and so the customer business only can claim back the VAT charged – the net effect to the tax authorities is zero. Also they do say that the discount must be a commercial rate which means it would only ever be pretty small and so the affect on the amount of tax would be very small.
Hello sir, I cant seem to find example 5 in the course notes for chapter 12 🙁
No – it has been removed and I will also remove it from the lecture.
The reason is that it is a UK tax rule and as such should not be asked in Paper F3 because it is not a tax exam.
On the test 2 question after this chapter. Could you explain why the delivery and installation on the Computer would be classed as a Non-Current Asset?
It is effectively part of the cost of the computer. We include all costs involved in getting it to a working state, and deliver and installation were necessary to have it working.
so I understand that, sales tax isn’t representing in inc statement. if it is not paid until end of year it will shown in statement of financial position? under liabilities?
That is correct. If it has not been paid it is a current liability.
HELP please!! Receivables ledgar-$15800 Error- A credit note to charles for $1000,plus sales tax of $300, had been posted to the receivables ledgar control account as $1300 and to charles personal account as $1000.
the answer subtracts 300 from 15800 for correction..Why is that so??
The entry in the receivables ledger control account is correct (Cr receivables ledger control 1300, Dr Sales 1000; Dr Sales tax 300)
However Charles account in the receivables ledger is wrong. We owes him the full 1300 and so his account should have been credited with 1300. But it has only been credited with 1000. So….the total of the balances in the ledger is wrong. Because it is a credit note, the total is too high by $300 and so 300 needs subtracting from the total.
I hope that makes sense 🙂
PS In future please ask this sort of question in the F3 Ask the Tutor Forum, not as a comment on the lecture 🙂
This was my first time posting a question so wasnt sure.Will do from next times onwards though. thankyou for the explanantion!! 🙂
Thanks so much. That makes sense
Kindly help with this question
A company made sales of $2,950 inclusive of sales tax at 18%. The company debited the Receivables account $2,950, credited sales $2,950 and credited the Sales Tax account $531. What corrections are required?
A- Dr Sales $450; Dr Sales tax $81; Cr Suspense account $531 B- Dr Sales $531; Cr Suspense account $531 C- Dr Receivables account $450; Cr Suspense account $450 D- Cr Sales $531; Cr Sales tax $450; Cr Suspense account $81
This time the workings in the answer are correct – the sales have been credited with 450 too much and so we need to Debit sales with 450.
The sales tax has been credited with 81 too much, and so we need to debit sales tax with 81.
The double entry for them is to credit suspense account with 531.
So although the workings in the answer are correct, the answer is A.
I also got answer A, although the workings are correct but the answer mentioned there in the notes is B, that got me confused. Thanks 🙂
Mr. Moffat, 450 where comes from? Can u explain? I don’t understand
The 2950 sales includes sales tax at 18%.
So the sales tax included is 18/118 x 2950 = 450.
Oh wow! Really? Has it been taken off the syllabus? or is it not going to be tested in the exam? Example 5 i mean. Just asking.
Example 5 is no longer relevant 🙂 Ignore it!
Hi John, is Example 5 the discounts example? Cheers!
Is it just me? or is paragraph there no paragraph 5 neither is there an example 5?
Please why is that? and is there any possible way I can get access to these?
It relates to specific sales tax rules (not double entry) which should not be examined.
Also with regards to question 2 in the test section, why is the Delivery and Installation charges included as being non-current assets? Surely they’re both perishable expenses and could not be “liquidated”? It’s a bit like adding the electricity used by the computer as a non-current asset?
No – it is different.
Delivery and installation are costs of getting the asset into a useable state, and they are not recurring expenses. Electricity is a cost of using the asset and is a recurring expense.
I’ve noticed that Example 5 is not in the lecture notes. Is this because it’s been removed from the syllabus from Feb 2014?
The syllabus has not changed, but it has always been questionable as to whether or not sales tax with discounts is examinable. Since it is a tax rule rather than an accounting problem, I think that it is unlikely to be asked.
In example 1, could you explain why answer is D and not C? I do: 480,000 – 10% (trade discount) = 432,000 – 5% (settlement discount) = 410,400 + 17.5% (sales tax) = $482,220.
Although your calculation of the sales tax is correct, receivables are debited with the amount owing without the settlement discount. The customer only gets the settlement discount is they pay within 14 days, and if they do then the discount is then credited to receivables and debited to the discount allowed account.
The settlement discount is 5% x 432,000 = 21,600, and so the total debited to receivables is 482,220 + 21,600 = 503,820
Sorry sir , why did we add the 21,600 to the 432,000 ? i ignored the 5% settlement discount so what i did is 432,000 *1.175 =507,600 so the answer is B . why its wrong ?
Nicky Cee says
When you calculating the price without cash discount, shouldn’t you charge sales tax on $48?
Because that is the rule for sales tax in the UK 🙂
Thanks for the reply…but.. ..for F3 we apply the rules of UK?…i m going to have the F3 exam at Cyprus!:)
There is only one variant for F3 (there is no specific UK version). I think it is the same rule throughout the EU anyway (but I am not sure about that).
The logic is that when the invoice is sent, we obviously don’t know whether they will pay quickly or not. If they do not pay quickly then you could argue that they are not paying enough sales tax. However, the tax people are not worried about that because most times it will be sales from one business to another business and so the tax charged by the seller is effectively reclaimable by the buyer and so there is no overall loss to the tax people. (Also, they do say that any discount must be commercial and so will only be small).
I have had to leave this in the course notes because it potentially could be asked. However the examiner should not really test it because it starts being tax rules and this is not a tax exam (obviously there are lots of other tax rules that are certainly not examinable). All that really should be asked are the basic entries for standard transactions.
Is operating profit and profit before tax and interest the same? ( it is regarding ther ratios)
In this context, yes – it is the same.
Hi Example 5 Why we charge tax on 912 not on 960, if we do not know whether the payment is made within 10 days?
Because that is the way the law works in the UK – the tax is calculated as if the discount was taken, and it is not adjusted at all if the discount is not taken.
(It may seem strange, but it has to be a ‘commercial’ level of discount – so the amount of tax involved will not be so great, and also remember that many sales will be made to VAT registered customers in which case it doesn’t really matter anyway because the customer will effectively get back the tax that the supplier has paid over.)
Gross price is the price EXCLUDING the TAX and net price is the price INCLUDING the tax right??? So for example 1, Lets say the gross price is x 116% * x = $150 which means that x = $129.31 (correct to 2dp) Now that we have the gross price, when we add the tax, we obtained the NET PRICE which is $150. From what you did, Gross price is $174 INCLUSIVE OF TAX??? :S #completelyConfused!
Wrong way round!
The gross price includes the tax, the net price excludes the tax.
So if the net price is $150 and the tax is 16%, then the tax will be 16% x 150 = $24. This means that the gross price is 150 + 24 = $174.
In questions relating to trade & cash discounts wrt to sales tax, is it correct to first deduct the trade discount, then add the sales tax amount calculated for given ST percentage & then deduct the cash discount as most of the times we are not sure if or not we are suppose to deduct the cash discount in the problem…? We can still have the same ans if we deduct all the discounts first & add up the sales tax later…
Is the answer to first question option D, and second one option B?
@chandhini, The answers are at the back of the Course Notes.
@chandhini, Oops! Sorry! I didn’t notice that.. 🙂
why u credit the payables?
@hamidrathore772, We credit payables because we owe money!
Brilliantly explained! Been struggling with this concept until now… Now explianed! Thank you!
Hi, i just have a question!in exam for instance if you have got the correct answer it doesnt really mather will way you get the answer will it?cuz for example in example 2 and 3 where we go backwords in order to find the net selling price and the amount of the salex tax i used a different method lets say but it cheks at the end!i just did 120×17.5% wich gives the amount of the sales tax of 38.5 and then i just did 120-38.5=181.5>the net selling price!is this a correct procedure?thanks
@monik, No its not. Gross amount is 117.5% (net price is 100% and vat rate is 17.5%). You have to follow the method mentioned in lecture.
Thank you i really tthought both methods were correct …. So i hv to follow only this right?
Very well explained. Thank you.
Cost of makink quicker sale= discount So shouldn’t it be included in the cost of sales in P&L?
When I take my F6 lesson the gross amount is the amount before tax; to gross it up i.e. to get the figure before the income tax was deducted. In this lesson the net value is before tax. ???
@danielglover, Sales tax is added to get the full selling price.
The net price is the price before the tax is added; the gross price is the price including the sales tax.
Don’t confuse it with income tax (which is not in the syllabus for F3). Sales tax is charged on the net selling price, income tax is charged on the full income.
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