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January 10, 2007

Is sales tax an expense or a liability?

If a company sells $100,000 of product that is subject to a state sales tax of 7%, the company will collect $107,000. It will record sales of merchandise of $100,000 and will record a liability for sales tax of $7,000. In this situation the company is acting as a collection agent for the state by charging the $7,000 in sales tax. The company will have to remit the $7,000 to the state shortly after collecting the money. When the company remits the $7,000 to the state, the company will reduce its cash and its sales tax liability. In this situation the sales tax is not an expense and it is not part of the company’s sales revenues.

If a company purchases a new delivery van for $30,000 plus $2,100 of sales tax, the company will record the truck as an asset at its total cost of $32,100. In this situation, the sales tax of $2,100 is considered to be a necessary cost of the truck and will be part of the depreciation expense recorded during the useful life of the truck.

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Comments

8 Responses to “Is sales tax an expense or a liability?”

  1. Kevin on January 9th, 2008 10:13 am

    What is a trust receipt and its double entry?

  2. Katahdin on March 14th, 2008 12:50 pm

    Instead of breaking out sales tax on a daily basis, we record the deposit for reconciling purposes, as cash and different credit cards. Thus the gross sales is overstated. I have been recording it in a liability account charging it off as an expense. When paid/disbursed debit cash/credit liability acct.
    Should we instead have an income acct (negative) that is a sub account of sales, instead. Think the numbers still work. TIA

  3. Venus on February 4th, 2009 9:06 pm

    May i know what is the sales tax double
    entry.

  4. Nancy on February 9th, 2009 4:23 pm

    When sales tax is collected:

    Debit cash. Credit accrued sales tax (a liability account).

    When sales tax is remitted to the government:

    Debit accrued sales tax. Credit cash.

  5. AK on March 7th, 2009 8:30 pm

    IS THE CORRECT WAY OF RECORDING SALESTAX AS FOLLOWS:
    ASSUMING $ 1000 IN NET SALES, $100 IN SALES TAX COLLECTED AND TOTAL $1,100 CASH COLLECTED

    DEBIT CASH 1,100.00
    DEBIT SALESTAX EXPENSE 100.00

    CREDIT SALES 1,100.00
    CREDIT SALES TAX PAYABLE 100.00

    THIS IS HOW WE WERE TAUGHT IN OUR CLASSES. ANY COMMENTS

  6. ALEiSHA on May 6th, 2009 9:06 am

    WOW THiS WEB SiTE iS REALLY NEAT:) iT HELPED ME DO A PROJECT AND LEARN AT THE SAME TiME:) KEEP UP THE GOOD WORK:)

  7. satyaki on May 7th, 2009 12:29 am

    While selling material whe have to collect sales tax as specified by the authorities.It is not our sales revenue. It is a collection from thr purchaser on behalf of the govt to be remitted to the govt. hence it is called as liabilty not an expense.

  8. dac on July 1st, 2009 11:05 am

    merchandise inventory at the end of the year is overstated. What happens?

    cost is overstated?
    oe over stated?
    gp understated?
    ni understated?

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