Definition and explanation
Sales tax is a tax levied by the government on the sale of certain goods and services. The companies, firms and individuals selling certain goods and services are required to collect sales tax from customers and periodically remit the collected amount of tax to the appropriate governmental tax authorities. In other words, we can say that the sellers not only collect revenue for themselves by selling their goods and services to customers but also collect revenue for the government in the form of sales tax.
The amount of sales revenue and the amount of sales tax collected from customer should be separately listed on the sales invoice.
Sales tax payable is a liability that arises when companies, firms and individuals sell goods and services and collect sales tax from customers on behalf of the government. A general ledger account titled as “sales tax payable account” is used to account for the amount of sales tax collected from customers and the amount remitted to the relevant tax authorities.
Sales tax payable account is a liability account that normally has a credit balance. This account is credited when sales tax is collected from customers and is debited when collected amount of tax is remitted to the relevant tax authorities.
The sales tax is levied at a certain percentage of the retail price of goods and services sold to customers. The percentage of sales tax levied by the government is not essentially the same on the sale of all types of goods and services. It usually varies depending on the nature of goods and services sold by various companies, firms and individuals. For example, sales tax levied on the sale of tobacco products may significantly differ from those levied on the sale of food and household goods. Similarly, the sale of some goods and services may be subject to exemption from sales tax.
Sales tax payable liability on balance sheet
The sales tax payable liability is normally payable within one year of the date of collection and is, therefore, classified as short-term or current liability of the business. When a business prepares its balance sheet, the balance shown by the sales tax payable account on the date of balance sheet is reported in the current liabilities section.
Journal entries for recording the collection and remittance of sales tax
Two journal entries are related to sales tax payable – one that is made at the time of collection of sales tax and one that is made at the time of remittance of sales tax to tax authorities.
(i). Journal entry at the time of collection of sales tax
When a business sells some goods or services to a customer and collects sales tax, it makes the following journal entry:
Sales revenue [Cr.]
Sales tax payable [Cr.]
The above journal entry increases the balances of cash account (or accounts receivable account in case of credit sale), sales revenue account and sales tax payable account.
(ii). Journal entry at the time of remittance of amount of tax to tax authorities
When the collected amount of sales tax is remitted to the relevant tax authorities, the following journal entry is made:
Sales tax payable [Dr.]
The above journal entry reduces the balance of sales tax payable account and the balance of cash account by the same amount.
The Marshal Company makes only four sales during the month of January 2019. These sales are made as follows:
- Jan. 01: A cash sale of $8,000 which is subject to 5% sales tax.
- Jan. 10: A credit sale of $5,000 which is subject to 4% sales tax.
- Jan. 25: A cash sale of $12,000 which is subject to 6% sales tax.
- Jan. 31: A credit sale of $15,000 which is subject to 5% sales tax.
The state in which Marshal Company operates requires the sales taxes to be remitted to appropriate tax agency by the 15th day of month following the sales. The Marshal remits the sales tax collection for the month of January to relevant tax agency on February 10, 2019.
Required: Prepare journal entries to record the four sales made by Marshal Company during the month of January. Also prepare a journal entry to record the payment of sales tax to tax agency on February 10, 2019.
(a). Journal entries to record the sales made during January:
(b). Journal entry to record the payment of sales tax to tax agency on February 10, 2019:
Total sales tax collected from customers during January:
$400 + $200 + $720 + $750 = $2,070
Keeping sales tax record when a sales journal is used for credit sales
If a business uses a sales journal to record credit sales, it usually provides a separate column to record sales tax payable resulting from each credit sale. At appropriate intervals, the total of this column is posted to sales tax payable account maintained in the general ledger. (See sales journal article). Similarly, any reduction in sales tax payable liability resulting from sales returns is recorded in a separate column provided in sales returns and allowances journal. The total of this column is debited to sales tax payable account at appropriate intervals. (See sales returns and allowances journal article).