When you are selling items to your customers, most likely you will collect & submit sales tax to your state. In the same way, when buying any products, typically you have to pay the sales tax. However, how can you record the tax collections & payments in the accounting books? You can either hire an individual who will maintain the accounts book or maybe a software to manage these things on own. If your company is little big enough, it’s always better advised to outsouce this to companies like TaxConnex who can easily assist with the sales tax filing.
Knowing about sales tax accounting will be a very important part to maintain them organized and right records. Continue to read to know more on how you can record sales tax.
What’s Sales Tax?
The sales tax can be imposed on the price of a few goods and services. It is actually charged as the percentage of selling price as well as is collected at a time of sale. An amount of the sales tax generally depends on the city, country, and state that your business has the physical presence. AS the tax regulations differ across various states, it is quite common for businesses to get separate sales tax accounts for every state.
How Can You Account for the Sales Taxes
When any customer gets billed for the sales taxes, a journal entry is a debit to accounts asset for an entire amount of their invoice, the credit to sales account for the portion of an invoice attributable to the goods and services billed, and credit to tax account for an amount of the sales taxes billed.
So, at the month-end, you will fill out the tax remittance form, which lists the sales & sales taxes and remit the government amount of sales tax that is recorded in the sales tax account. The remittance will happen before any customer has paid its related invoice. So, when the customer pays for an invoice, debit the account for an amount of payment & credit accounts receivable account.
But, what if any customer doesn’t pay the sales tax of an invoice? In such a case, issue the credit memo, which reverses an amount of sales tax account (which is the reduction of accounts asset account). It’s likely that you may have remitted the sales tax to the government, thus the customer’s non-payment gets the reduction in the next sales tax remittance.
What Are the Type of Account That Is Tax Payable?
Sales tax accounting generally is a process to create journal entries for recording the sales tax that you collect & pay. The sales tax entry depends upon if you’re collecting the sales tax from the customers and paying tax to the vendors.
When the tax is taken from your customers, it is the liability of a business. Sales Tax Payable will be the liability account in a balance sheet, which keeps proper track of sales tax that is collected from your customers for the tax authority. So, the business holds the funds and will be liable for remitting them to the state on a timely basis.
Suppose your business sells the products and services where taxes are levied, then you will have to set up the system, collect & pay sales tax regularly.
As every state has got its tax rate & list of the taxable products or services, you will have to decide which products or services will be taxable, decide the tax rates, check out exemptions, collect taxes & pay this to your state on time.
Sales tax accounting
Whenever you purchase any products & pay tax on the goods, you should create a journal entry. In such a case, sales tax is the expense and not the liability. Normally, your total cost for your purchase includes the price of items & its sales tax. Decrease the Cash account & increase the corresponding expense account. As expenses will be increased through the debits, debit the expense account & credit the Cash account.
When any company bills their customers for the sales taxes, such sales taxes aren’t the expense to a company; they’re the expense to their customers. From the company’s perspective, the tax billings are actually the liabilities to the local government till remitted.
It is common to have a separate tax liability account. Suppose the company functions in multiple states, then having a separate account for sales taxes collected makes it simple to make the remittances. It reduces work needed to justify the company’s remittances in an event of a sales tax audit.