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 Unit price and Amount fields. The resulting tax amount must be backed out of the Total. 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
- Expense claims
- Sales and purchase 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 be 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 the appropriate tax liability account, where they offset one another according to whether they are being paid or received.
Caution
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 tax amount is calculated for all line items subject to a specific tax code by multiplying the amount for that line item by the percentage associated with the tax code. Then, all line item amounts for a specific tax code are summed to obtain the tax amount for that code. The tax amounts for all tax codes are added to the sub-total to derive the total for the transaction.
Example
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 a tax liability account, 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 the tax liability account and 1,000 to an income account. It would debit Accounts receivable by 1,100.
Notes
When multiple tax codes are applied on the same transaction, presentation differs slightly. A Tax column is added, designating which line items are subject to which tax codes. And totals for each tax code are shown separately:
Receipts and payments use a slightly different format from that shown in the example above. When the transaction is tax-exclusive, the Tax amount is displayed for each line item as well as the Tax rate. If the purchase in the illustration immediately above had been recorded with a payment form instead of a purchase invoice, the completed transaction would look like this:
Tax methodology for tax-inclusive pricing
When entering tax-inclusive prices, the situation is opposite. Manager calculates (but does not display) the tax-exclusive unit price that would have produced the tax-inclusive price 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.
Example
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 the tax liability account, 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 the tax liability account 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.
Caution
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.