Goods return (Cash sale/purchase) causes Gross Sales error

[Patch]

@Abeiku

If I return an item I bought for my money, I have not made a sale or generated income, I have cancelled a previous purchase

By the requirements/definitions specified in existing tax legislation, and what customers actually do when returning goods, this is almost alway the case in practice.

@Tut

This is a purely semantic debate.

No, Manager makes an accounting error resulting in user supplying false information to the tax department. The error is such that it is difficult for users to detect that is occurring, so worse than an overt error. Most small business only introduced accounting software because they need to submit regular business activity statements (GST summary), so currently Manager is not actually fit for purpose.

@Tut

No, you may not have sold an item in your inventory to a customer as such a transaction is ordinarily understood. But you delivered goods to someone and received compensation. If I told you only of the circumstances in the previous sentence, you would most likely agree that I had made a sale.

A valid sale for GST purposes is defined by taxation legislation via multiple specific requirement. See (and the detailed explanation which follows it):

@Patch

Option 2: A taxable sale or purchase is defined by jurisdiction specific requirement on the goods / service provided, supplier obligations, and purchaser obligations.

This interpretation is hard coded into all invoices, credit notes and debit notes in Manager so are consistent with this interpretation. However if this convention is correct, then all negative line items in sale and purchase “cash” transaction and about half journal entry line items, are all incorrect. As a result sales and purchase totals reported in Managers are higher than this accounting convention dictates.

I am not aware of any jurisdiction where their taxation legislation allows:

@Patch

Option 3: Accounting convention can be altered on a per transaction basis at the book keepers discretion

If this option is correct, both of the above options could be used in a business during a taxation reporting period. This is the current way Manager behaves.

This accounting error Manager makes is much broader than just cash returns but getting back @Abeiku example
Abeiku buys an item, say a face mask and some gloves from another person say JohnsChemist. During this transaction as legally required

• John is registered or required to be registered for GST and:
• John makes the sale for payment
• John make the sale in the course or furtherance of a business (enterprise) John carry on
• the sale is 'connected with Australia
• John issues a valid “Tax invoice”

As a customer Abeiku, can claim a GST credit for the face mask provided

• Abeiku retains the tax invoice for 5 years
• Abeiku buys the face mask for use in Abeiku’s normal business

The important feature to note is no reference is made to accounting software used or if the book keeper enters the transaction as a cash sale/purchase in Manger or enters and invoice in Manager.

Now Abeiku takes the face mask to work, finds he got the wrong sort or they are faulty. He takes the possibly faulty face mask back to JohnsChemist and demands a full cash refund. John cares about the quality of service he offers so complies.

The GST reporting implications of this second transaction depend on what is actually documented and the normal business of Abeiku and John. In almost all cases the chemist John (the original supplier) will edit his original “Tax invoice” to show a sale not including the face masks (leaving just the gloves). This legally defines the transaction as return and results in a negative adjustment to Abeiku purchases and Johns sales. As explicitly stated in British VAT law [Withdrawn] How to report EU sales made on or before 31 December 2020 for VAT - GOV.UK

Manager accurately documents the transaction if Abeiku’s book keeper enters a purchase invoice in Manger and Johns book keeper enters a sales invoice in his Manager business.
If Abeiku’s book keeper does not enter an invoice in Manager, Manager will report the face mask return as a new sale (a different amount reported to the tax department because of a decision Abeiku’s book keeper made). For Abeiku to legally claim the GST on the original face mask purchase he needs a valid tax invoice (which he no longer has). Abeiku is also in breach of his requirements as a “Seller” as

• Abeiku did not provide a valid tax invoice within 28 days on return of the face mask to John.
• Abeiku did not make the sale in the course or furtherance of a business (enterprise) Abeiku carrys on

And from Johns perspective

• Johns has not received Tax invoice for the “purchase”/return of the face mask so can’t retain it for 5 years
• John has not bought the possibly faulty face mask at full retail price for use in John’s normal business (his business would go broke if that was his supply chain), he has accepted a return.

@Tut you are correct a very similar transaction could be a new sale but for that to be the case different documentation is required and Abeiku needs to have a different normal business. For example, suppose Abeiku normal business was a commodity trader. He may have traveled around buying all gloves and face mask from all chemists (including Johns). He retained them in his warehouse then when a later supply shortage occurred he sells them back to various outlets (including John’s) for an inflated price. The second sale would then be a new independent transaction. Abeiku would issue a valid tax invoice to John for products and service provided as part of Abeiku’s normal business.

The important message to take away from this discussion is

@lubos

The only way to make it work 100% would be to introduce new option on journal entries, receipts & payments where you could indicate whether transaction is considered a sale or purchase for tax purposes.

Manager can not tell for cash transactions if the transaction pertains to a sale of purchase as defined by each jurisdictions tax laws. Which is why accounting software must rely in the user specifying if it is a sale or purchase.