Tax determination and the automatic booking to G/L accounts – and what sweets have to do with it.
Not the most interesting of subjects, I admit. But certainly one which can cause headaches. The issue here relates to tax groups and tax codes. I am thinking here in particular about the parameters needed in connection with the Tax setup in order to achieve two important objectives:
- Automatic tax determination
- Automatic G/L account entries
Let me show you how you can set up a clearly defined tax determination system in Microsoft Dynamics 365 for Finance and Operations (EE).
The tax setup generally consists of four groups:
- Tax group
- Item tax group
- Tax code
- General Ledger account group
But how do these interact?
A short story
Imagine it’s a sunny Tuesday afternoon and you are in the office. You suddenly have an urge to eat something sweet.
You of course head off to the office kitchen in the hope of finding something to sate your appetite. As you storm into the kitchen and set your sights on the drawer containing the chocolate bars, you catch sight of four grinning faces. Those of your colleagues. You soon understand why they all have mischievous expressions on their faces. Every one of them is holding a chocolate bar in their hands. The drawer is empty. The only thing you can do is ask them to share. You ask politely, and one of them, Roman, says that they will share if you can show them that you know what tasks they are responsible for at the company. Surprised by the condition attached to sharing, you realize that you have never really thought about their roles.
Paul Taxgroup is sociable and speaks a number of languages fluently. He is always in touch with both vendors and customers. And not only domestically, but also within the European Union and in all other countries. His task is to categorize every customer. He remembers exactly which category they belong in. He then meets up with his colleague John Taxcode.
His tasks: Vendor master records and customer master records
Elisabeth Item-Taxgroup loves the smell of warehouses. She carefully checks every item as she strolls up and down the aisles. She marks every item with a Post-It. She holds a clipboard in her left hand. This is where the ‘laws’ are written accordingly to which she categorizes the goods. She also deals with services. It looks rather odd when the plumber leaves the building with a Post-It stuck on his forehead. She then meets up with her colleague John Taxcode.
By the way, Ann’s maiden name was Item. Guess who her husband is?
Where she spends most of her time: Item master, requirement category, project category
John Taxcode is the company’s top number cruncher. Calculating percentages is child’s play for John. It was always clear that he would end up in a job in which he could show off his mathematical skills.
John has his hands full. He always needs to be in touch with Paul and Elisabeth. On the one hand, he asks Paul which customer or vendor is coming in or leaving and, on the other, asks Elisabeth at the same time which types of items or services they have just delivered or provided. As soon as he knows both, he whips out his pencil and calculates the tax rate. He then writes this on every position of every incoming and outgoing invoice. As I mentioned, John is kept very busy. He informs Roman after he has processed every invoice.
His task is tax setup.
General Roman Ledgeraccountgroup
General Ledgeraccountgroup, an army veteran, is the accounting specialist. Roman (as his colleagues call him) is informed by John about every invoice. John passes the tax codes, the tax rates and the amounts on to Roman. Roman removes his calculation table from a drawer in his solid oak desk. This table shows him which G/L account has been set up with which tax code. As a result, and thanks to John, he knows how much needs to be posted to which account.
His tasks are the tax setup and the ledger accounts.
Your colleagues nod and smile. You have explained everything perfectly, and get your share of the chocolate. You now have an idea about how tax is handled and the rewards this knowledge can bring. While you are happily munching away, each of your colleagues pats you on the shoulder on the way out of the kitchen saying: “Now that you understand our tasks, we can go on vacation. Have fun!”
Wait a minute, that wasn’t the deal!
The tax group is associated with a customer or a vendor. This is defined in the customer or vendor master record. The item tax group, on the other hand, is defined in the item master or the category. The relevant tax codes are defined in these groups. Only if the tax code is the same in both groups will these groups and the code be active.
The tax code defines the percentage with which the tax is ultimately calculated on the basis of the net price. The general ledger account group is also defined using the tax code. This defines which G/L accounts (e.g. input tax 2500, sales tax 3500) are posted to when processing the transaction.
When the same tax code is set up for the item tax group and the tax group, then the general ledger account group defined in the tax code will also be used.
This means that there is no need to manually select a tax account and therefore means fewer incorrect postings. This relates to all processes involving invoices, from procurement (creating incoming invoices) to outgoing invoices and project accounting.
Right. It’s time to go to the office kitchen.