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GST Clearing Accounts in Accounting: Definition & Examples

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  • 0:04 General Services Tax
  • 0:43 A Quick Example
  • 1:07 GST Clearing Account
  • 3:31 Lesson Summary
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Lesson Transcript
Instructor: Martin Gibbs

Martin has 16 years experience in Human Resources Information Systems and has a PhD in Information Technology Management. He is an adjunct professor of computer science and computer programming.

When accounting for transactions in Australia, we need to account for the General Sales Tax (GST). This lesson will define the GST Clearing Account and provide examples of its use.

General Services Tax

Businesses are required to collect 10% GST, or General Services Tax, on all goods and services provided. Depending on how the money is collected, there are different tax and accounting procedures. If we collect GST from customers, the amount is recorded in a special clearing account called the GST Clearing. It's a credit because it increases our liability. We are liable to the Australian Tax Office to pay 10% of goods and services sold. However, if the business makes purchases, then we debit the GST Clearing Account for the amount paid. These purchases are expenses, and therefore, it decreases the amount we will owe to the Australian Tax Office at tax time.

A Quick Example

Sometimes you will receive an invoice or statement that shows a price with GST included. If you need to know the GST, divide the total by 11. For example, an invoice is received for equipment totaling $467.50. This is how it's calculated:

  • $467.50 / 11 = $42.50 GST

GST Clearing Account

Now that we have an understanding of how GST is collected, let's look at some examples. We'll be using the example of a small business, a butcher, and her various sales and expenditures. We'll be logging these entries into the general journal, which has a column for the date, particulars, and the debits and credits. The totals for the accounts (such as Bank or Sales) will be entered into the general ledger and applicable statements (income statement, balance sheet).

On July 1, our butcher bought a set of knives on credit for $1,250 plus GST. She (or her accountant) will need to enter the increase to inventory (debit), the credit to cash, and the GST as follows in this table:

Date Particulars Debit Credit
1-July Inventory (purchase of knives) 1250
GST Clearing 125
Accounts Payable 1375

Remember that the entry to GST Clearing results in a debit (decrease) in our overall GST liability to the Tax Office. In this case, 10% of $1,250 is $125, and this is this amount booked.

Now that our butcher has some knives (and a lot of other equipment!) she can start selling products and services. She completes a sale for the processing of some wild game. The total sale is $750 plus GST. The general journal entry will look like this one:

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