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PSA: Freshbooks and GST/HST

Hi all,

If anyone has clients using Freshbooks, look out for funny accounting for GST/HST (or any other VAT based sales tax for that matter). The way it accounts for sales tax is very US centric.

Freshbooks will record GST/HST collected as a liability. However it will expense the GST/HST paid on expenses even though your clients entered the tax amount. What’s more bizarre is that the profit/loss statement excludes the “HST expense”. Only when you roll the retained earnings will it be apparent. I’m still trying to see what madness the report is doing.

Be very careful of this as you can get burned as it could result in not claiming any ITCs. You should catch it with the Sales tax report as that will correctly show the GST/HST and ITC, resulting in a net amount. But, this net will not equal the balance sheet amount. So effectively they have a sales tax report that doesn’t reconcile to the balance sheet (win!).

Support’s useless solution was to make a new custom account on the balance sheet and do a reclass out of P&L to the balance sheet. That’s a hackjob accounting process, but unfortunately prying my client off Freshbooks will cause more issues.

Anyway, look out for this one… Unless someone has already dealt with this and Freshbooks support is just useless.


Below is their useless response rather than fixing the problem:
Hello,

Thanks for your patience, the account experts said that the sales tax liability will show up in the Balance Sheet, but sales tax paid does not - not all sales taxes are recoverable so we do not reduce the liability by the sales tax paid on the balance sheet. To view the sales tax paid you can refer to the General Ledger report for a breakdown and if you have a recoverable sales tax, you can use a JE to post the sales tax paid against the liability.

Did you have any questions regarding this?

Yours,
XXX

1 Like

They answered in terms of “Sales Tax”, which is irrelevant.

They did not answer your question at all regarding a VAT.

So it sounds like this “customer service expert” ought to have said:
“Thank you for your patience. Freshbooks can account for SALES TAXES, but Freshbooks CANNOT handle or account for VAT at all, in any way whatsoever.”
.
.
For Canadian purposes. it sounds like manual apportionment for posting would be necessary, using separate appropriate GL accounts.

@joe.justjoe1 Agreed, manual intervention is necessary in this case. Seems like its very US sales and use tax biased.

At least all the HST that the client is entering on their expenses ends up in one single P&L account when Freshbooks posts the expense. Then I can just reclass out into the appropriate balance sheet account. But I like process driven accounting, manual entries are a waste of time when they can be avoided.

@echan

I find your thread re Freshbooks and GST/HST to further add to my list of concerns about supporting Freshbooks based clients. So far my issues include:

  • cash basis only
  • limited reports
  • GST/HST not properly posted

I have similar concerns about WAVE.

Generally, I find that clients who use either WAVE or Freshbooks are very price-conscious and cash basis motivated and enter their transactions based upon bank and credit card statements or cash receipts. Usually, these clients also report their income based on the date of their deposit. Often they are missing many of their source documents and rely on their statements as their documentary evidence. That means that in most cases source documents were never created and rarely gathered. Often the expenses items were not pro-rated by business use. Converting these clients to proper tax compliance, based upon business use and accrual accounting can prove to be extremely time consuming and arduous.

In general, if I chose to accept such a client, I export their information to Excel and then recreate their books based upon actual invoices and vendor bills. I cherry-pick only their “cash and carry basis” expenses from their excel. I recreate these various expenses in a series of Excel worksheets for proration and to validate GST/HST. I have a separate worksheet to reconcile income from cash-basis to accrual-basis. Then I create Income and Expense statements. This is a lot of work and requires pricing consideration.

Alternately, I can teach the client how to redo this information.

For the current year, I would encourage the client to either switch to Xero or QBO from Freshbooks or Wave, or, give them an excel to complete for tax accounting purposes.

If I had Caseware or some other financial statement preparation application then I could recreate the information using that application.

Of course, this system applies best for Proprietorships or Rental properties. It is an exercise in frustration for corporations. Those are best served by a proper double-entry, accrual basis application which is Canadian GST/HST compliant such as Xero, QBO, or Sage 50.

After 20+ years of trying to bend myself into a prezel to fit the clients’ unreasonable demands while still being tax compliant, I am totally converting my tax accounting practice with clear expectations, roles, responsibilities, and pricing. In the event of a tax review or audit, those price shopping, cash basis, PITA clients always expected unlimited support at no additional cost and were outraged when or if they failed audit. They are noisy and angry and looking for someone else to blame. After a 5 year transition from taking anyone and everyone who had a need and who seemed reasonable up front, I now accept only those clients who are tax compliant from the get go, or, who accept and pay for the conversion for the past year, and, who are willing to switch to compliant system for the current year. It has been a hard transition mostly on my part to change my mindset, procedures, pricing, and client on-boarding. Let those who bring you garbage and who refuse to pay to get their ledgers done properly go to the Tax Franchises. Take only those who want quality work to build a prosperous and sustainable Tax Accounting business. Any other choice will likely lead to burnout or grief in the end unless you have very tight controls and strictly enforcement procedures.

@dominique.dabolczi Freshbooks seems to have come a tiny bit of the way. It appears to now allow accrual based accounting and cash basis accounting and does run double entry accounting in the background. Yes, the reporting function seems rather sparse, I’m used to the nicer reports in QBO.

I have a client with Wave and it seems it can handle the calculation and posting of GST/HST. I’ve tested the reports and review the balance sheet and it seems to work.

I do agree with your general comments above about clients that basically rely on their bank statements/credit statements. Even more so now that most of these cloud based programs auto download from the bank accounts through data aggregators. It’s a blessing and a curse.

In a perfect world, everyone would be tax compliant as your suggested. I’ve gone from Big4 to large industry (in house) and now practice on my own. Even at large companies they cannot get it right. So my approach is slightly different. With new clients I meet, I run a few diagnostic tests on their books. We sit and have a conversation about the exposure they have. Management makes a decision on whether to accept the exposure as is, or change the way things are done. If the exposure if relatively minor and management accepts the risk, then I run with it. If it’s a massive exposure, I’ll walk.

Although I will say, generally from what I’ve seen in Freshbooks, QBO, Wave, for simplicity they slam the GST/HST collected and ITCs into one single account, which I’m not a fan of. I prefer to account for ITC and GST/HST collected in separate accounts and at the end of the month I’ll clear out the balances to a GST/HST clearing account for filing. I tend to find things are cleaner that way but that could also be me being super picky.

I haven’t looked at Freshbooks recently, last time was at one of Alan Salmon’s meetings. At the time they were trying to tell us it was an accounting program but I disagreed. I think at best it can be used as an online invoicing tool but then those invoices need to be entered into a real program.

I have worked with various clients that “cheap out” using these so-called cloud-based accounting apps. I have to agree with jimt. At best they are good for preparing and sending invoices to customers. They are somehow convinced by the pretty pictures provided by these software developers that their app will do what it takes us accountants years of education and even more years to hone our skill sets to do.
For this reason, I love these cloud-based app users. Anytime someone brings me their online app file, it means double, triple, maybe even quadruple the fees just to fix the messes they’ve created. Same goes for those that use online tax filing apps.