Sale Tax Accounting
Sale tax is the markup amount that the seller needs to charge from customers and pay it to the government on a monthly basis. Sale tax percentage is different from country and state, and it could be rank from 0% up to 50%.
Sale tax is the responsibility of suppliers to charge from the customer on behalf of the government. If the goods are sold many times before reaching the final user, the sale tax must be calculated in all stages and pay to the government. All suppliers in each stage play a role as the government agency to collect sales tax on behalf of the government.
Sale tax is included in the bottom of the sale invoice in addition to all line items. When we charge sale tax to customers, it means we just act on behalf of the government. This portion belongs to the government, and it should not include in our profit and loss statement.
Sale Tax Example
Company A sold the goods to the final user for $ 10,000, excluding tax. Assume the sale tax is 5%. Please calculate the sale tax for all companies.
Company A sells goods for $10,000, so the sale tax is $ 500 (5% * 10,000), which needs to pay to the government during the months. (assume company not buy material with tax).
Accounting record when sale:
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | 10,500 | |
| Sales | 10,00 | |
| Sales Tax Liabilities | 500 |
At the end of the month, the company needs to settle sales tax to the government:
| Account | Debit | Credit |
|---|---|---|
| Sales Tax Liabilities | 500 | |
| Cash | 500 |
When the customer settles the payment:
| Account | Debit | Credit |
|---|---|---|
| Cash | 10,500 | |
| Accounts Receivable | 10,500 |
Sale tax payable is the liability which the company owes to the government. The company should have a big balance as they tend to buy low and sell high. So the receivable balance should lower than payable balance and should be clear at the end of the month.
Sale Tax Account for Buyer
When the supplier sell product to customer needs to charge sale tax base on the percentage. This amount of sale tax needs to record as a liability (Sale Tax Liability). This liability will be settle when cash is paid to the government.
When customers purchase goods with sale tax, they do not need to record the sale tax, and it will part of the purchase asset or expense. This amount will be included in assets or expenses if the customers are the final user.
