Early payment discount ( Canada )

Hello,

I have a problem with early payment discount. Here in Canada we have to apply tax on the full price and give the discount after calculated on the original sale amount before tax. How can i do this since it doesn’t seem to work.

I tried to take out the credit note as said in the guide but the numbers are wrong

1740 of sale
87 TPS
173,57 TVQ
2000,57 Total

The credit has to be applied on 1740 * 2% = 34,80

The system gives me a rebate on 2000,57 * 2% = 40,01

When i ask to take out the taxes the amount comes down to 34,02…

What am i doing wrong?

  • Enter a line item with the normal 2% VAT tax code for the full price

  • Enter a negative amount line item for the discount with a zero VAT tax code

Did you read the Caution statement at the very end of the Guide: https://www.manager.io/guides/14497? It addresses this exact issue.

Yes i read it but it doesn’t work properly. You take out the taxes on the wrongly calculated discount. So the new number is not good either. There should be an option to calculate the discount directly on the sale price…

Thanks for the help. I know i can do it manually but i try to see if there’s a way to use the automated function and make it work

OK, please explain all your numbers. How much is the untaxed good or service being sold? What is TPS? What is TVQ? Likewise, if these are percentage sales taxes, how much are the percentages?

1740$ is the sale price
87$ is the federal tax (TPS 5 %) TPS = taxe sur les produits et services
173,57$ is the provincial tax (TVQ 9.975%) TVQ = taxe de vente du Québec
2000,57$ is Total price

Let say i have a customer with 2/10 n30 and he pay after 3 days

Then he would get a rebate of 1740$*2% = 34,80$

So the payment would be 1740$ +87$ + 173,57$ - 34,80$ = 1965,77$

For the moment what i found the easiest way to do is to edit the credit note and enter the calculation
in the amount field 1740*0.02 to get the right amount.

Depending on what you did with the tax code, that might or might not be a way to accomplish your goal. Let me illustrate the method described in the Guide.

First, I create a custom tax code with two components for your federal and provincial tax:

Screen Shot 2020-08-22 at 2.47.49 PM

Then I create a sales invoice with your example figures, applying the custom tax code to it. I offer a 2% discount if paid within 10 days. The Edit screen:

and the View screen:

Screen Shot 2020-08-22 at 2.56.36 PM

The problem with that, as you experienced, is that the discount is calculated on the full amount, including tax, just as the Guide says it will be. That is because Manager assumes an early payment discount—if it occurs—is a price reduction (again, as the Guide stipulates) and will be subject to a reduction in tax due. For the sake of illustration, let’s follow that scenario through to its conclusion.

The customer pays early, so I enter a receipt for $1960.56 using the New Receipt button on the View screen of the sales invoice. Manager recognizes that the receipt qualifies for the early payment discount and applies it. The sales invoice now looks like this:

Screen Shot 2020-08-22 at 3.11.10 PM

More importantly, the Summary page looks like this. Note the Tax payable and Inventory - sales figures. Also note that Accounts receivable has not taken the discount into consideration:

Now I follow the prompt for the early payment discount and issue the credit note. The sales invoice balance remains at zero, but because of the credit note rather than the early payment discount:

Screen Shot 2020-08-22 at 3.13.33 PM

Accounts receivable has gone to zero, as expected. However, since I did not remove the tax code on the credit note, my Tax payable account has declined. But so has the Inventory - sales account. Remember, the discount was treated like a price reduction:

At this point, I would be happy, but the tax authority would not. If I had deleted the tax code on the credit note, the sales invoice would be unchanged, but the entire $40.01 amount of the credit note would have gone to an income reduction. None would have reduced my tax bill:

What have I just done? I’ve paid my customer’s tax out of my own profit. The tax authority is happy. My customer is happy. But I am not. What can I do in the future? There are two options:

  • Reduce the discount percentage to account for the tax. The revised percentage would be 2/1.14975) = 1.7395. And the revised invoice would show:

    Screen Shot 2020-08-22 at 3.05.25 PM OR

  • Manually calculate the discount amount as you have been doing.

Both methods offer the $34.80 discount you intended. But in either case, it is important for compliance with your tax law that you delete the tax code on the credit note. If you don’t, the credit note will reduce your tax due and bring the tax authority down on your head. This is what I was referring to at the beginning, when I said your approach might or might not be a way of accomplishing your goal.

Ultimately, the exact method you choose will depend partly on how much you want to explain to your customer about Canadian tax laws regarding early payment discounts.

Thank you for your answer.

I created the tax code the same way as you are explaining. I still think that the best way for the moment to make it work is to adjust the credit note as i did for consistency since you are telling the customer that you give him 2% discount so i want this to be reflected in the system…

I can still use the feature and be advertise when i receive a payment before the term so it’s not that bad. It would be better not to have to edit the credit note but i can live with this…

In Québec for early payment discount that’s the way it works. I didn’t know that it was different elsewhere!

Anyway thanks for your help!

Isn’t this simply wrong accounting practice? This not only occurs with early payment discount but also with withholding taxes. I guess @lubos just has to correct these errors. Normally there are separate accounts for sales discounts and purchase discounts.

BTW, early payment discounts should also be available for purchase invoices.

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I don’t think it is wrong because it seems legit in some countries or jurisdictions.

But early payment discount amount in my jurisdiction should not use the tax-inclusive amounts. The transaction should be between an expense account and accounts receivable. Revenue accounts and Tax accounts should be excluded. The seller has to pay the full VAT on the sale per the original sales invoice, that is the position of the tax authorities.

Tax Credit Notes/Revised invoices (Quantity discounts too) are the only documents which can effectively change the tax payable.

Going forward @lubos need to allow users to do both:

  1. The Option to Include Tax in the computation of Early settlement discount
  2. The Option to Exclude Tax in the Early Settlement Discount.

In all the jurisdictions I know of, early payment discount is not calculated on tax-inclusive amounts.

Which countries are doing so? That seems weird to me as it means applying a commercial discount (freely decided by the company) on a fiscal tax fee (mandatorily imposed by the government), and that, to me, is deducting apples from pears.

No, it definitely is not. It is entirely a matter of how the taxable sale is defined under local law.

They are not errors. There are many perfectly acceptable ways to account for discounts. Suppose, for example, you sell taxable services. The price is what you and the buyer agree is the hourly price. If you normally sell the service for 100 per hour, but agree with one customer to sell for 90, is that a discount? Or is it just a different price? The answer depends on what information you want to collect and how you design your chart of accounts as a consequence.

Too many to name, but basically any jurisdiction where a tax is imposed on the price actually paid as opposed to the price originally listed. (Remember, not all tax jurisdictions are countries.)

This is a different matter. This qualify as a rebate and not an early payment discount the two are different. If you go to the store and they say there’s a 50% discount on a 100$ piece of cloth, then you will pay the tax on 50$.

The thing with early payment discount is that you already agreed to pay the full amount, the “contract” is signed, so the governement wants the full tax because maybe you will give the discount maybe not. It’s important not the mix those 2 different situations.

Again, this is a matter of local law. If the early payment discount was offered in the contract (of which the sales invoice can form all or a portion), the price is not fixed until the time of payment is known. Elements of a contract are offer, acceptance, and consideration. In your example, the offer included the possibility of the discount. Final acceptance did not occur until the customer decided when to pay, as a result of which consideration was reduced.

Under most contract law, once you have offered the discount, you are legally bound to honor it if the terms are accepted and fulfilled. There is no maybe.

But we stray far from the topic of accounting for early payment discounts.

Anyway, the thing is that if you want the app to be used everywhere on the planet, it should cover the needs for those different situations…I like the software and been using it for my personal use for a couple of years but i don’t see how i could be using it with clients because there are other options where it is working out of the box without having to remember that the credit note has to be edited to get it right. At some point you will forget to do it.

As it does, as is explained in the Guide. Regardless of options selected by the developer as default or how the alternatives are implemented, conscious choices must be made by the user. Even the decision to offer an early payment discount is a choice requiring positive action, no matter what options are available. The credit note is not an automatic process conducive to your easily forgetting what must be done. You must take concrete steps to generate it, so it is your responsibility to make sure all details are correct before clicking Create. In this respect, the action is no different from any other transaction in Manager.

I know that from my point of view it would be better if it was working according to the tax law here as i guess it is for you.

On the other hand why the feature is not available for purchase invoice?

I think that this is basically because it is a passive action and you have to account exactly what you receive from the supplier so it cannot be automated. It is the same thing of withholding tax for purchase invoices

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It makes sense!