Let’s take a look at an example in a pristine business (no other transactions):
We create one expense claim payer and enter a claim for 100. Note, there is no option for tax-exclusive transactions in expense claims. That really would not make sense, because the full amount of the payment made to a merchant by the expense claim payer is being claimed. Tax is not being added to a bill you are sending to a customer. Regardless, if there is no tax applied, here is the expense claim:
And relevant lines in the Summary look like this (everything else is zero):
If 10% tax is now included in the 100, there are two options:
- The tax is a non-offsetting sales tax, so the tax is treated as part of the 100 purchase price. No tax code is needed, and the Summary does not change.
- The tax is an offsetting VAT (or similar), so we want to capture it. So we apply a 10% tax code. The tax is backed out of the 100 (not added to it) and the result looks like this:
The business still owes Joseph Sample 100. But only 90.91 of that is an expense. The remaining 9.09 is a contra liability it will collect from the tax authority.
If @Abeiku’s tax-exclusive example is used, the total amount paid and claimed by Joseph Sample would have been 110:
And the Summary would look like this:
Now, one could argue that it would be nice to have a checkbox for tax-inclusive versus tax-exclusive, although for an expense claim it isn’t necessary because the merchant who sold whatever to whoever did the tax calculation for you. All you need to know is the total and the tax rate. And if the tax is non-offsetting, you only need the total.