Sale Tax Accounting

Sale tax is the markup amount that the seller needs to charge from customers and pay to the government on a monthly basis. Sale tax percentage is different from country to country, and it could be ranked 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 end consumer, the sale tax must be calculated and collected in all stages. 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 at the bottom of the sale invoice in addition to all line items. However, tax amount is not separated from the purchase price, but we can calculate it by using reverse tax. 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 is a tax that is imposed on the sale of goods and services. The tax is calculated as a percentage of the selling price of the good or service. In most jurisdictions, the tax is collected by the seller from the buyer at the time of sale. The tax is then paid to the government. Sale tax is generally imposed on all sales of goods and services, but some jurisdictions exempt certain items from tax, such as food and medicine.

Sale Tax Journal Entry

When the company sells the goods to the customers, suppliers will charge based on their expected price which allows them to generate profit from the sale. The company calculates the selling price by marking up the cost of goods sold. It means the company will be able to get some profit over the sale after excluding the cost of goods sold and other expenses.

So if the government wants to charge a sale tax, the company needs to add another component over the desired price. The amount depends on the government tax law. In most cases, the sales tax is calculated as a percentage of the purchase price. For example, if you buy a shirt for $50 and the sales tax is 10%, you will be required to pay an additional $5 in tax. The amount of sale tax will be recorded as the current liability on the balance sheet.

The journal entry is debiting cash and credit sale tax payable.

Account Debit Credit
Cash 000
Sale Tax Payable 000

Sale tax payable is the current liability on the balance sheet which the company has to pay to the government base on the promised date.

At the end of the month, the company has the obligation to pay the collected amount to the government.

The journal entry is debiting sale tax payable and credit cash.

Account Debit Credit
Sale Tax Payable 000
Cash 000

The sale tax payable will be reversed when the company settles the obligation with the government.

Sale Tax Example and Journal Entry

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 at the end of the month. (assume company does not buy material with tax).

Journal Entry when sale: The company record debiting accounts receivable $ 10,500 and credit sale $ 10,000 and sale tax payable $ 500.

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:

The journal entry is debiting sale tax payable $ 500 and credit cash $ 500.

Account Debit Credit
Sales Tax Liabilities 500
Cash 500

The transaction will decrease cash $500 and decrease sale tax payable $ 500.

Journal Entry when the customer settles the payment: The journal entry debiting cash $ 10,500 and credit accounts receivable $ 10,500.

Account Debit Credit
Cash 10,500
Accounts Receivable 10,500

Sale Tax Accounting for Buyer

When the supplier sells the product to a customer needs to charge sale tax based on the percentage. This amount of sale tax needs to record as a liability (Sale Tax Liability). This liability will be settled 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 be part of the purchase asset or expense. This amount will be included in assets or expenses if the customers are the end consumers.

Important of Sale Tax

  • Fairness: The tax is calculated as a percentage of the purchase price and is generally collected by the seller at the time of sale. Sales taxes are generally considered to be fair because they are collected from everyone who makes a purchase, regardless of income.
  • Simplicity: Sales taxes are quite simple compared to other taxes. They are levied on the sale of goods and services and are usually based on a percentage of the purchase price. In most cases, sales taxes are collected by the seller and then remitted to the government. As a result, sales taxes are often seen as a more efficient way to raise revenue than other types of taxes.
  • Easy to collect cash: Sales taxes are one of the most common types of taxes, and they are also one of the simplest to collect. Unlike other types of taxes, the collection of sales taxes is embedded in the price of goods and services. The sales tax is automatically collected when goods and services are sold. This system simplifies tax collection and makes it easier for businesses to comply with tax laws.

Disadvantage of Sale Tax

  • High sale tax: In some cases, the tax is so high that it does not allow people to purchase these items. This can be a significant problem for people who are struggling to make ends meet. It’s also worth noting that these high taxes disproportionately impact low-income people.
  • Regressive: A sales tax is a tax levied on the sale of goods and services. It is regressive in nature, meaning that it disproportionality affects low-income earners. This is because rich people can pay the price for goods no matter how high it is, whereas poor people may not be able to afford the same item. This can make it difficult for low-income families to make the purchase.
  • Increase the cost of production: Sales tax increases the burden on the manufacturing industries. These taxes discourage industries because of the high cost of production and less profit. Many factors contribute to the high cost of production, including the cost of raw materials, labor, and overhead. In addition, sales tax increases the price of goods sold by manufacturers, making it more difficult for them to compete with businesses in other states.