5.1: Sales Tax
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.
| 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.