ACCT1001 · Financial Accounting 1
Retailing and GST
Once a business buys and resells goods instead of providing a service, the accounting gains three new layers: inventory and cost of goods sold, the Australian GST, and the multi-step income statement. Under the perpetual system every sale is a paired entry — one entry records the sale and the GST collected, a second records the cost of the goods sold and the reduction in inventory — so the inventory account and COGS stay current in real time. Purchases, freight in and freight out, sales returns and allowances, and settlement discounts each have their own treatment, and all of them must split out the 10% GST: GST collected on sales is a liability owed to the ATO, GST paid on purchases is an asset (a credit reduction of that liability), and the net is remitted on the Business Activity Statement. The chapter ends with the multi-step income statement — Net Sales − COGS = Gross Profit, then operating expenses split into selling and administrative — which is the format the exam expects you to produce.
What this chapter covers
- 014.1 Service vs merchandiser — the new accounts
- 024.2 The perpetual inventory system & the paired sale entry
- 034.3 The GST machine: GST collected (liability) vs GST paid (asset)
- 044.4 Purchases, freight in & freight out
- 054.5 Sales returns, allowances & settlement discounts
- 064.6 The multi-step income statement (Net Sales → Gross Profit → Net Profit)
Worked example: a perpetual sale with GST, both entries
- +1Split the GST out of the $1,100: the GST-inclusive price is 110%, so GST = $1,100 × 10/110 = $100 and the sale (ex-GST) = $1,000.
- +2Entry 1 — record the sale and GST collected: Dr Accounts Receivable $1,100 / Cr Sales Revenue $1,000 / Cr GST Collected $100 (GST Collected is a liability owed to the ATO).
- +1Entry 2 — record the cost of the sale: Dr Cost of Goods Sold $700 / Cr Inventory $700 (perpetual updates inventory in real time).
- +1Check the gross profit: Sales $1,000 − COGS $700 = $300 gross profit on this sale; the $100 GST is not revenue, it is a liability.
Key terms
- Perpetual inventory system
- A system that updates the Inventory and Cost of Goods Sold accounts after every purchase and every sale, so stock and COGS are known in real time. Each sale needs a paired entry — one for the sale and GST, one for the cost and the inventory reduction. Contrast with the periodic system, which counts stock only at period end.
- GST collected
- The 10% goods and services tax charged on taxable sales. It is a liability owed to the Australian Taxation Office, not revenue — the business collects it on the ATO's behalf. The GST-inclusive price is 110%, so GST = price × 10/110.
- GST paid (input tax credit)
- The 10% GST a registered business pays on its purchases. It is recoverable — recorded as an asset / a reduction of the GST liability — so the business only ever remits the net of GST collected minus GST paid to the ATO on its Business Activity Statement.
- Cost of goods sold (COGS)
- The cost to the business of the inventory it sold during the period. Under the perpetual system it is recorded with the second entry of every sale (Dr COGS / Cr Inventory). Net Sales minus COGS gives gross profit, the headline figure of the multi-step income statement.
- Multi-step income statement
- The merchandiser's income statement format: Net Sales minus Cost of Goods Sold gives Gross Profit, then operating expenses (split into selling and administrative) are deducted to reach Net Profit. The extra subtotal — gross profit — is what distinguishes it from a service business's single-step statement.
Retailing and GST FAQ
Why does a perpetual sale need two journal entries?
Because two different things happen at once. The first entry records the revenue side — the amount the customer owes (or pays), split into sales revenue and the GST collected. The second entry records the cost side — the goods have left the business, so Cost of Goods Sold is debited and Inventory is credited for what those goods cost. The perpetual system keeps inventory and COGS current after every transaction, which is why both entries are required.
How do I split GST out of a GST-inclusive price?
A GST-inclusive price represents 110% of the ex-GST amount (100% goods + 10% GST). So the GST component is price × 10/110, and the ex-GST amount is price × 100/110. For example, $1,100 inclusive contains $100 of GST and $1,000 of sale. If a price is stated as GST-exclusive, you instead add 10%: GST = price × 10%.
Is GST collected revenue?
No. GST collected is a liability owed to the Australian Taxation Office — the business is collecting it on the ATO's behalf, not earning it. Treating GST collected as revenue is a common and costly error: it overstates sales and profit. Only the ex-GST sale amount is revenue; the GST sits in a liability account until it is remitted, net of GST paid, on the Business Activity Statement.
What is the difference between freight in and freight out?
Freight in is the cost of getting purchased inventory to the business; it is part of the cost of that inventory, so it is added to the inventory cost (it ends up in COGS when the goods sell). Freight out is the cost of delivering goods to customers; it is a selling expense (delivery expense) on the income statement, not part of inventory cost. Mixing the two is a classic gross-profit error.
Exam move
The perpetual paired sale entry is the workhorse of this topic — drill it until both entries (sale + GST, then COGS + inventory) are automatic, and always split the GST out before you write anything. Keep the GST direction straight: GST collected on sales is a liability, GST paid on purchases is an asset/recoverable, and only the net goes to the ATO. Practise classifying freight (in = inventory cost, out = selling expense) and the treatment of returns and settlement discounts, because these are where gross profit gets misstated. Finish by producing a full multi-step income statement from a trial balance — Net Sales → Gross Profit → Net Profit — since that is the format the exam asks you to deliver.
