You should understand accounting for sales tax to maintain organized and accurate records. That way, you can easily record sales tax in your books. Let’s say you sell $5,000 worth of goods to a customer, which is subject to a 5% sales tax. First, determine how much sales tax you need to collect by multiplying the sales by the sales tax rate. You must collect $20 in sales tax ($400 X 0.05) and charge the customer a total of $420 ($400 + $20).
Collected sales tax is not part of your small business revenue. When you collect sales tax from customers, you have a sales tax liability. When you sell goods to customers, you likely collect and remit sales tax to the government. And when you purchase products, you typically pay sales tax. But, how do you record these tax collections and payments in your accounting books? Nearly all states, charge a state sales tax on purchases to fund government programs.
If the amount paid is quite small, some governments allow the funds to be remitted at much longer intervals, such as once a quarter or once a year. As of 2011, only five states do not impose sales taxes. Issue sales tax payments quarterly, posting your sales tax liability to the Sales Tax Payable balance sheet account. The concept behind the adjustments is to record sales tax income as a payable amount and a reduction in cash, and prevent it from posting as revenue. If your business has a physical presence in a state with a sales tax, you must collect sales tax from customers.
Accounting for sales tax paid on purchases
Your total bill is $1,040 ($1,000 + $40), which includes the amount of the supplies and the 4% sales tax. When you remit the sales tax to the government, you can reverse your initial journal entry. To do this, debit your Sales Tax Payable account and credit your Cash account. Because sales tax is lumped into the total amount your customers pay, you will include the sales tax as part of the total sales revenue in your accounting books, too. You must remit your sales tax liability to the government.
- That business will collect sales tax from its customers.
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- The concept behind the adjustments is to record sales tax income as a payable amount and a reduction in cash, and prevent it from posting as revenue.
- Sales taxes payable is a liability account in which is stored the aggregate amount of sales taxes that a business has collected from customers on behalf of a governing tax authority.
Sales tax that has been collected represents a liability until the company remits the cash to the government. When a company collects sales tax, there is no income statement impact. When you collect sales tax from customers, you increase the corresponding liability account, which is your Sales Tax Payable account. And because you collect the sales tax, you also must increase your Cash account.
What is the journal entry to record sales tax?
To record received sales tax from customers, debit your Cash account, and credit your Sales Revenue and Sales Tax Payable accounts. Some goods, like raw materials, may be sales tax exempt. If you sell raw materials to another business that then sells them to customers, you generally won’t collect sales tax from the business. That business will collect sales tax from its customers.
When you purchase goods and pay sales tax on those goods, you must create a journal entry. In this case, the sales tax is an expense, not a liability. Debit your Cash account for the total amount the customer paid you. Then, credit your Sales Revenue account the purchase amount before sales tax. And, credit your Sales Tax Payable account the amount of the sales tax collected.
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You might be wondering, do I have to charge sales tax? As a seller, you’re responsible for collecting sales tax if you have sales tax nexus (e.g., a business presence) in the state. Likewise, as a buyer, you must pay sales tax if the seller has sales tax nexus. When you buy goods subject to sales tax, the seller collects the tax from you.
- When you remit the sales tax to the government, you can reverse your initial journal entry.
- You don’t need to call out the sales tax you paid in a sales tax expense entry—it’s just part of your overall purchase expense.
- Then, credit your Sales Revenue account the purchase amount before sales tax.
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Some states charge sales tax on all items and services, while others only tax certain services. For example, most food is exempt from sales tax in Wisconsin and most clothing is exempt in Pennsylvania. For organized records, create a Sales Tax Payable account. This represents sales tax money you collected from customers but have not yet remitted to the government. The supplies are subject to a sales tax of 4%, which is $40 in sales tax ($1,000 X 0.04).
How to Analyze Trial Balance in the Steps of the Accounting Cycle
Decrease your Cash account and increase the corresponding expense (e.g., Supplies) account. Because expenses are increased through debits, debit an expense account and credit your Cash account. Generally, your total expense for the purchase includes both the price of the item(s) and the sales tax. You don’t need to call out the sales tax you paid in a sales tax expense entry—it’s just part of your overall purchase expense. Sales tax accounting is the process of recording sales tax in your accounting books.
As a result, collected sales tax falls under the liability category. When customers buy from you, you do not pay sales tax—customers pay sales tax. You simply collect and remit it to your state or local government (it passes through you).
What is the journal entry to record sales tax payable?
The sales taxes payable account is always considered to be a short-term liability, since (as just noted) the funds are always to be remitted within one year. Typically, the account is combined with the balance in the accounts payable account and presented in the balance sheet within the accounts payable line item. Sales taxes payable is a liability account in which is stored the aggregate amount of sales taxes that a business has collected from customers on behalf of a governing tax authority. The business is the custodian of these funds, and is liable for remitting them to the government on a timely basis. If the organization remits large amounts of sales taxes, the government probably requires sales taxes payable to be remitted once a month.
