Wednesday, October 23, 2013

Purpose and usage of Tax Rate Variance Account

Purpose and usage of Tax Rate Variance Account.

Tax Rate Variance reflects the tax variance between the invoice and the PO distributions due to difference in tax applicability.

Tax Rate Variance is normally computed for the Non recoverable portion of the Tax. It is computed in two cases:

a) When there is a difference in the Tax amount of the PO and Invoice.
For Example: PO# 122046
Lines Amount: 14.49
Tax Amount: 1.16
Total Amount: 15.65


AP invoice# 135324
Item Amount: 14.49
Freight Amount: 14.62
Tax Amount: 0
Total Amount: 29.11
Tax Rate Variance: 1.16

In this case, Tax is calculated on PO# 122046 which is 1.16. But, on invoice there is no tax calculated. Hence, the Tax Rate Variance account recorded the difference in tax amount 1.16.

b) When there is a difference in the Taxes computed (for instance an extra tax calculated on Invoice and the same did not exist in PO).

For Example: On PO# 121985
Lines Amount: 57.62
Tax Amount: 4.60 (State Level Tax: 2.30 + County level Tax: 2.30)
Total amount: 62.22


On AP Invoice# FJ17597
Item Amount: 57.62
Freight Amount: 13.71
Tax Amount: 5.70 (State Level Tax: 2.85 + County Level Tax: 2.85)
Total Amount: 77.03

Here the applicable tax rate is 4 and State Level and County level tax is calculated in following way.

Tax for Items+Freight (57.62+13.71) = 71.33 * 0.04 = 2.85
If tax is calculated only for Freight: 13.71 * 0.04 = 0.54
Difference of Total tax and Freight Tax (2.85 - 0.54) = 2.31 which has 0.01 difference from the tax on PO.

Hence, Tax Rate Variance account has recorded the tax variance amount on Invoice Distributions as 0.01.

@Article Submitted  by Amrutha

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