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5.1: Sales Tax

  • Page ID
    43087
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    Merchandising businesses that sell product to end-users (customers that intend to use it themselves rather than sell it to another party) often are required to collect state sales tax. Sales tax collected accumulates in a liability account called Sales Tax Payable. Periodically (every two weeks, month, or quarter, depending on size and location of the business) the balance in the Sales Tax Payable account is sent to the state sales tax agency.

    19a. Sale on account without sales tax   20a. Sale on account with 8% sales tax
    Date Account Debit Credit   Date Account Debit Credit
    19a Accounts Receivable 1,000     20a Accounts Receivable 1,080  
      Sales   1,000     Sales   1,000
                Sales Tax Payable   80
    19b. Sale for cash without sales tax   20b. Sale for cash with 8% sales tax
    Date Account Debit Credit   Date Account Debit Credit
    19b Cash 1,000     20b Cash 1,080  
      Sales   1,000     Sales   1,000
                Sales Tax Payable   80

    Notice that the sales tax does not become part of the Sales account.

    The following journal entry would be made when the monthly sales tax is due if the Sales Tax Payable balance was $5,500.

    21. Paid sales tax of $5,500.
    Date Account Debit Credit
    21 Sales Tax Payable 5,500   Sales Tax Payable is a liability account that is decreasing.
      Cash   5,500 Cash is an asset account that is decreasing.

    Sales tax is NOT a business expense since it is a payment of customers’ money to the sales tax agency rather than the business’s money.


    This page titled 5.1: Sales Tax is shared under a CC BY-SA 4.0 license and was authored, remixed, and/or curated by Christine Jonick (GALILEO Open Learning Materials) via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.

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