Choose between tax-exclusive and tax-inclusive prices

Tax-exclusive prices do not include tax. Taxes calculated according to any tax codes applied are added to the Sub-total of a transaction to obtain a Total. Tax-inclusive prices already have any applicable taxes included in their line item Amount fields. Manager can handle either situation with selection of the same tax code. But tax amounts calculated will, necessarily, be different. So will effective unit prices for the same entry in the Unit price field.

The basics

The election of tax-exclusive versus tax-inclusive pricing can be made on:

  • Receipts and payments
  • Sales quotes
  • Sales and purchase orders
  • Sales and purchase invoices
  • Credit and debit notes

Default choices can be made for each form type in Form Defaults under Settings. Such defaults can edited on a transaction-by-transaction basis. When a form has a financial impact, such as a receipt, sales invoice, or debit note, amounts contributing to the untaxed sub-total are posted to appropriate income or expense accounts. Calculated taxes are posted to Tax payable, where they offset one another according to whether they are being paid or received.

If the tax scheme in your jurisdiction does not offset taxes paid against taxes collected, do not use tax codes on your purchases. Include tax in the unit price of every line item, where it will add to the expense of the item.

Tax methodology for tax-exclusive pricing

Tax-exclusive pricing is the most intuitive. A sub-total is calculated for all line items subject to a specific tax code; then, the sub-total is multiplied by the appropriate percentage to obtain the tax amount. The tax amount is added to the sub-total to give the total. If more than one tax code is applied on a transaction, separate calculations are performed before adding together all sub-totals and tax amounts for a total.

You buy an item for 1,000 plus 10% goods and services tax. If the amount of 1,000 is tax-exclusive, 10% tax is added to it, increasing the total to 1,100. The tax shows as an addition when you create a purchase invoice:

Since the transaction is a purchase, 100.00 is debited to Tax payable, where it offsets amounts you have collected from customers on behalf of your tax authority. The 1,000.00 sub-total is debited to the designated expense account. The entire 1,100 is credited to Accounts payable.

If this were a sales invoice instead of a purchase invoice, entries would be similar, but results would be reversed. Manager would credit 100.00 to Tax payable and 1,100 to an income account. It would debit Accounts receivable by 1,100.

Tax methodology for tax-inclusive pricing

When entering tax-inclusive prices, the situation is opposite. Manager calculates what tax-exclusive unit price would have produced the tax-inclusive amount after tax was added. The program does this for every line item. This calculation is:

Tax-exclusive price = Tax-inclusive price / (1 + Tax rate)

Thus, both effective unit prices and calculated taxes are lower for tax-inclusive pricing, assuming identical inputs.

You make the same purchase as in the previous example, using a payment form, but pricing is tax-inclusive. The resulting Total, calculated tax, and presentation change:

Manager debits only 90.91 to Tax payable, 909.09 to the designated expense account, and credits 1,000.00 to the bank or cash account where the transaction is entered.

Were this a receipt, Manager would credit 90.91 to Tax payable and 909.09 to the designated income account. It would debit a bank or cash account by 1,000.00

Choosing tax methodology

You can make unit prices tax-inclusive by checking a box. The choice applies to the entire form:

You can set your choice as default using Form Defaults.

When purchase or sales prices have been defined for inventory or non-inventory items, choosing a different tax methodology does not modify the unit price entered automatically as the item is selected. So you should always be aware of how your inventory and non-inventory prices were determined and choose the matching tax methodology.

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