Expenses showing in liability accounts
Madeleine
Member Posts: 4
I have just received a support email (copied below) alerting me that some of my liability accounts have sales tax applied. However when I filter my transactions to show only liability transactions, the ones with sales tax applied are all actually paid expenses in categories that came preloaded in Wave such as Computer - Software etc. These are also showing as expenses in their expense accounts in the normal way. I'm not clear why these are showing as liabilities. Help?
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We have identified that your account contains liability and equity transactions with sales taxes applied. This may have led to inaccurate numbers in your Sales Tax report which you will need to fix manually (instructions are included below).
Applying sales taxes to liability or equity accounts is not in line with accounting best practises as an equity or liability transaction does not represent a taxable transfer of goods or services.
Going forward Wave will prevent the addition of sales taxes to these categories, excluding income and expense transactions run through a credit card.
To fix your impacted transactions, please complete the following steps:
Navigate to Accounting > Transactions in Wave.
Choose the ‘Filter’ button in the top right, and filter your transactions for only those in Equity Account and Liability Account categories.
Choose ‘Select All’ and then ‘Edit’. Under 'Change...' you will want to choose Tax, and under 'To...' choose 'Remove all Sales Tax'.
Once complete, please verify the accuracy of your tax filing by comparing your sales tax report in Wave to your filed records from the same period.
Comments
I think if you take a screenshot of your transaction that might help people troubleshoot. It's possible for your "Category" to be "Computer - Software" but for "Account" to be a "Liability" account.
I have a similar question as I have paid for business expenses using an equity account (Owner Investment/Drawings) because I don't have my personal bank account linked up to wave. It's a legitimate business expense with government tax applied and my business is GST registered so I don't understand how this is an incorrect application of tax to an equity account as Wave is suggesting? How else should I account for business-related tax-applied expenses paid with a personal bank account?
I think when you are accounting for something in "Drawings" it is as if you are withdrawing funds from the business - it is not classified as a business "expense" but rather as a removal of funds out of the business. So for example, if I pay for a personal expense such as a meal using my business card, I account for it as "Drawings" (and don't record the GST). It's as if I withdrew the $ from my business then paid for the meal personally. If you are paying for business expenses using your personal bank account, you could still record them in WAVE as "expenses" with GST - perhaps create separate expense accounts in WAVE to record the business expenses that you pay for using your personal bank account.
My question is why my paid expense transactions, which are showing up in my expense accounts in WAVE like normal and with GST applied, are ALSO showing up as accounts payable in liabilities - which is incorrect... whereas expenses with NO gst attached are NOT showing up as accounts payable (I tried to upload screenshots showing the same transactions appearing in both expenses and liabilities, but it wouldn't work)
Yep, I got the same email today and don't understand either.
I have the same question as Madeleine:
I have paid business expenses that include sales tax, and have used my personal bank account and credit cards - I need a way to record the sales tax on these transactions.
Currently I used the payment source as Owner Investment/Drawings, which is simple and time efficient. How does Wave propose to record these transaction? - is Wave proposing to add extra transactions to make this more complicated and burdensome?
I just got the same email.
Most of the items that come up when I apply the filters to show equity and liability accounts are expenses - both personal and businesses - that have GST. Even if not business expense - I categorise personal expenses as 0wner/ investment drawings that are coming up under Equity accounts - I would think I'd still need to note that GST applied but I could be wrong.
Same email, and agree with everything said above - what is coming up for me is anything that has had GST applied.
What worries me also is the note that "going forward Wave will prevent the addition of sales taxes to these categories".
Hi everyone! @paperwings @Pkenn @Alan_Magner @Madeleine @elisemartinson
Thank you for your questions; we recognize that the initial email was not super clear. I'm sorry about this. Let's expand more below.
To clarify, Wave will not be disabling or suggesting you remove sales tax from liability and equity accounts such as credit cards if those transactions are either income or expense transactions (which are taxable).
For example, were you to categorize a withdrawal from your bank account as a 'Payroll Liability' (a liability categorized transaction) this would not represent a taxable event in your business. However, a meal purchased via credit card is a taxable event (expense incurred and paid through your business) and will still be allowed in Wave.
Following the instructions to filter for Liability and Equity accounts in Wave via the Filter button may bring up income or expense transactions in a Liability or Equity account, or even on asset accounts. When bulk editing to remove sales tax, you can uncheck any transaction categorized into a liability such as credit card. See screenshot below:
If sales tax is inadvertently removed from income or expense transactions , you can quickly read those taxes by choosing the relevant Equity or Liability accounts from the account selector in the top left of the transactions page; filtering for income and expenses; and re-adding tax where necessary.
Lastly, depending on how far back these transactions go in your business, this may have thrown off sales tax reporting numbers. As such, when deciding whether to make these changes on historical data, we definitely advise that you reach out to a tax accountant or tax preparer.
As an example, I paid for a software subscription using my bank account funds. I coded it as an expense (not a liability) and recorded the sales tax that applied within the expense transaction as per usual. However now the transaction is showing up in both my expenses AND my liabilities ledger, which seems wrong?
Thanks
Madeleine
Hey @Madeleine , your Sales Tax is a liability so this may be playing into the situation here. This software subscription payment you made, which account is located in and where is that account located in your Chart of Accounts?
Let me know!
Hi Alex
Thanks - as an example, I paid $10 including GST for my Microsoft365 subscription. I paid using my business bank account (not credit), and it is coded as total amount $10 including 0.91 GST. I coded it under expenses as Computer - Software (a category which came preloaded in Wave).
When I go to Transactions in Wave and filter to show only expense accounts, the transaction is there.
When I then clear that filter, and filter to show only liability accounts, the transaction (and what looks like all other expense transactions which included GST) are there.
I am not trained in accounting but my understanding is that GST I've paid on an expense is not a liability I owe, but rather an asset (a debt the government owes to me), which is netted against the GST I've received on sales - that GST being the liability.
Thanks
Hey @Madeleine , Sales Taxes are indeed liabilities. It's difficult for me to explain this, but all sales and purchases that you make with a sales tax offset each other to determine what is owed. Either way, this falls under the Sales Tax account which is a liability.
The following article from Accounting Coach may be able to shed some more light on this for you!
https://www.accountingcoach.com/blog/sales-tax-liability