Accounting for Sales Tax

What is the Sales Tax?

The tax, called a sales tax, is collected from the customer by the seller and later paid to the appropriate tax official in the state government.

Explanation

Most state governments and some county and city governments in a country levy a tax on the retail price of goods and services sold to the end-user. This tax is called a sales tax. Rates charged for sales taxes range from a low of 3% to a high of 11%, depending on the state.

Accounting for Sales Tax

To illustrate how to account for sale tax, we will use Angie Shaffer, who owns the Surf-N-Sand Shop, located on Tybee Island, Georgia. The sale tax rate on Tybee Island is 6%. thus, when Angie recently sold a $200 surfboard, she collected a sales tax of $12 (.06 x $200). Accordingly, the customer paid Angie $212 for a $200 purchase. The following general journal entry records the sale. Notice that the amount of sales taxes is recorded in the Sales Tax Payable account.

Accounting-for-Sales-tax-Recorded-in-Sales-Tax-Payable-account

Had the sale been on credit, the entry would be the same, except that the debit would have been to the Accounts Receivable account and the individual customer’s account, instead of to the Cash account.

Reporting Sales Taxes Collected

Most states require that sales taxes collected during the month be sent to the appropriate state official by the middle of the following month. To record this,  a debit is made to the Sales Tax Payable account (to decrease the merchant’s liability for these taxes), and a credit is made to the Cash account.

Example

To illustrate, we will continue the above example of the Surf-N-Sand Shop. During July 20X0, the store had a total sales of $60,000. Since the sales tax rate in the area is 6%, $3,600 (.06 x $60,000) in sales taxes was collected on these sales. In Georgia, sales taxes collected one month must be sent to the State Department of Revenue by the 20th day of the next month. Angie thus prepared the sales tax report illustrated in the below figure.

Monthly-Sales-Tax-Report

The following journal entry was made to record payment of the taxes.

Journal-Entry-To-Record-Compensation-to-file-sales-tax-return

Notice that Angie was allowed to keep a small percentage of the sales taxes collected as her fee for collecting the taxes and sending them in. She records this fee ($375) as miscellaneous income. Had Angie been in a state that did not allow the merchant to keep a portion of the taxes as a fee, her entry would have been as follows:

Journal-entry-to-send-sales-tax-return

Recording Sales Tax in Sales Journal

As we know, credit sales subject to a sales tax can recorded in a general journal. If the volume of credit sales is large, however, a more efficient use of journalizing and posting time can be made by expanding a one-column sales journal to three columns: (1) Accounts Receivable Debit, (2) Sales Credit, and (3) Sales Tax Payable Credit. The total amount to be received from a sale (selling price plus sale tax) is entered in the Accounts Receivable debit column. The amount of sale the sale is entered in the Sale Credit column. And the amount of sales tax charged on the sale I entered in the Sales Tax Payable Credit column.

To illustrate the use of a three-column sales journal we will use the example of Jervis Gift Shop, a retailer. The March 20X0 Sales journal of Jervis Gift Shop is presented as:

Multicolumn-Sales-Journal

notice the account numbers written in parentheses directly below the column totals in the above figure. The account number, as you remember, show that the column totals were posted to the general ledger. The check marks in the P.R. column mean that the individual amounts were posted to customers’ accounts in the accounts receivable ledger.

Sales Returns Involving a Sales Tax

If a customer returns merchandise on which a sales tax was charged, the amount of sales tax must also be returned to the customer. To illustrate this, look again at the sales journal of Jarvis Gift Shop. On March 12, Lisa Chadwick returned merchandise she bought on March 9 for $32.50 plus $1.95 sales tax. The following general journal entry was made to record the return.

Journal-entry-Sales-Returns-Involving-a-Sales-Tax

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