In order to understand how sap helps in tax accounting, we need to understand what is tax accounting and what are the challenges faced by tax department in a company.
What is tax accounting?
Whenever company does a business transaction, corresponding tax amounts has to be paid to the concerned tax authority.
The tax rate (tax percentage) is decided by the tax authority. Tax authority decides how many different taxes are applicable on a business transaction and corresponding tax percentages.
Tax authority in each country has a unique set of taxes (list of different taxes) which may be applicable to business transactions.
Company is liable to pay taxes either monthly/ quarterly/ annually and file tax returns with the tax concerned tax authority. For tax payment and filing of tax return, company has to prepare various reports which have details of transaction and corresponding tax amounts. For company to be able to prepare tax reports, whenever business transaction happens along with transaction details corresponding tax amount also needs to be recorded.
Hence tax accounting refers to recording of taxes along with business transaction details for the purpose of tax payment and tax return filing.
Example:
Consider a company selling a product to customer.
Product price: 100 Tax rate: 12%
Company will record below accounting entry in its account books
DR. Customer 112
CR. Sales 100
CR. Tax 12
Challenges faced by tax department in a company
Incorrect reporting of tax by company may invite legal action by tax authority. Company can’t afford to make mistakes in tax reporting and tax filing.
Everyday company does a large number of transactions, tax department employees of the company become overloaded with the task of calculating and recording tax. Moreover, when it comes to tax filing, tax department of the company has to prepare various reports by putting together all the tax relevant information. Preparing tax files manually is very time consuming and prone to mistakes.
Recording and tracking tax information manually is error prone.
Preparing tax files manually becomes time consuming.
Companies need to be more efficient and effective in tax handing. Companies need to prepare tax files (reports) quickly as well as error free.
How sap enables books keeping of tax?
Sap enables automatic calculation and recording of tax information. Whenever a transaction happens, along with transaction details tax information is also recorded automatically.
Since tax is calculated and recorded automatically hence chances of recording wrong tax amount is less (less manual intervention ensures less chances of error).
Since all transaction and respective tax amount is recorded in database, hence tax files (reports) can be generated as and when needed without time delay.
Hence sap enables better tax reporting and faster generation of tax reports.
Sap handles below types of taxes:
Tax on sales and purchases
When company does a purchase from vendor, tax is applied and charged by the vendor. This tax is known as input tax.
CR Vendor 112
DR Purchase account 100
DR Input tax account 12
Whenever company does a sale to customer, tax on sales is applied and charged to customer. This tax is known as output tax.
DR Customer 165
CR Sales account 150
CR Output tax account 15
Company is liable to pay tax amount 15 to tax authority but since company already paid 12 as input tax. Hence net tax amount yet to be paid is 3 (15-12).
Net tax payable = Output tax collected – Input tax already paid
Note: Tax authority can set a portion of input tax as non-deductible portion which cannot be claimed (cannot be offset against output tax) from tax authority.
Sales tax & use tax
Sales tax & use tax are used in USA.
Sales tax is applied when goods are procured for the purpose of consumption from supplier within the state.
When goods are procured from outside state, then use tax is applied.
Offsetting output tax with input tax is not applicable in case of sales tax & use tax.
Withholding tax
In certain countries, tax authority mandates that a portion of vendor invoice is withheld and paid directly to tax authority.
Example:
Company needs to pay 112 (inclusive of tax amount 12) to vendor and vendor needs to pay tax amount 12 to tax authority.
CR Vendor 112
DR Purchase account 100
DR Input tax account 12
Instead of vendor paying 12 to tax authority, company will withheld tax amount of 5 and pay directly to tax authority. Vendor will pay tax amount 7 to tax authority.
Company will record below accounting entry in its account books.
CR Vendor 107
DR Purchase account 100
DR Input tax account 12
CR Withholding tax account 5
Tax authority uses the concept of withholding tax so as to restrict tax evasion and get access to tax amount quicker.
Sap enables automatic calculation and recording of tax information along with transaction details and hence enables company to handle tax accounting efficiently and effectively.
GL ACCOUNTING
- What is SAP FICO ?What business requirement is fulfilled in this module?
- What is enterprise structure in sap fico?
- What is GL account? What is account group? What is operational chart of accounts?
- What is the need of country chart of account or alternate chart of account? How country chart of account helps fulfill a business requirement?
- What is the need for group chart of account? How group chart of account helps in consolidation of financial data?
- What is non leading ledger in sap fico?
- What is company code global settings? What global parameter is assigned to company code?
- What is fiscal year variant? Why fiscal year variant is assigned to company code?
- What is posting period variant? Why posting period variant is assigned to company code?
- What is field status variant? What is field status group?
- What is document type in sap? Explain the purpose of document type?
- Document date vs Posting date vs Entry date vs Translation date. Explain
- What is posting key? what is the use of posting key?
- Document header & line items capture information of business transaction.
- Everything about currency & exchange rate in sap.
- Foreign currency valuation in sap. Explain with example
- Retained earnings account helps in year end balance carry forward. Explain
- What is the significance of tolerance groups in sap?
- What parameters are maintained in GL master and how does it impact in document posting?
ACCOUNTS PAYABLE
- What is meant by accounts payable in sap?
- Understanding procure to pay (PTP) cycle and accounting document at each step.
- Understanding MM FI integration in very simple terms.
- Purchase order price determination in SAP. Explained in very simple words.
- House bank, Bank key, Account ID in SAP
- What configuration (FBZP) needed for executing F110 in sap ?
ACCOUNTS RECEIVABLE
- How sap overcomes challenges in accounts receivable process?
- What is customer reconciliation account?
- Understanding order to cash cycle in sap.
- Understanding SD FI integration in very simple terms.
- What is lock box? How lockbox helps in collection from customers?
TAX ACCOUNTING
- How sap helps in tax accounting?
- Tax configuration in sap: Tax procedure, Tax code & Tax jurisdiction code
- Concept of tax jurisdiction code & tax jurisdiction structure
- Significance of “Tax category & Posting without tax allowed” in GL master.
- Tax base amount and Discount base amount
- Assigning tax code V0 & A0 for non taxable transaction?
- Deductible input tax vs non deductible input tax
WITHHOLDING TAX
- Withholding tax in sap explained with example.
- How sap overcomes challenges in managing withholding tax?
- Withholding at the time of invoice or payment
- Withholding tax configuration in sap
- Business place & Section code in sap
- Withholding tax certificate numbering in sap
- Withholding tax report for filling tax returns
ASSET ACCOUNTING
- How sap helps in asset accounting?
- What is meant by asset accounting?
- What is the use of asset class?
- What is the use of depreciation key in asset accounting?
- Depreciation area and Chart of depreciation in sap.
- Derived depreciation area VS real depreciation area?
- Understanding asset accounting configuration needed in sap
- GL account determination for posting asset transaction
- Asset transaction and corresponding accounting document?
- How depreciation is posted in sap?
SAP CONTROLLING
Transaction with customer needs to be recorded in account books. With each transaction with customer, account receivable may decrease or increase. Hence each customer is to be linked with GL account (account receivable). Whenever transaction with customer is entered, corresponding GL account mapped with customer is posted.