Sales Tax Payable: Videos & Practice Problems

Sales taxes are an additional charge based on a percentage of the sales price, which customers pay at the point of sale. For instance, while some states like New Hampshire may not impose sales tax, most states do, leading to a situation where the price displayed on an item does not reflect the final amount paid. This extra amount, known as sales tax, is collected by the company and then remitted to the government, meaning it is not considered revenue for the company but rather a liability until paid.

To illustrate how sales tax works, consider the example of Oak, Nebraska, which imposes an 8% sales tax. If a company, such as the Oak Nebraska Riding Company, generates $240,000 in sales, the sales tax can be calculated by multiplying the sales amount by the sales tax rate:

Sales Tax = Sales Amount × Sales Tax Rate = $240,000 × 0.08 = $19,200.

This means the total cash collected from customers would be the sum of the sales and the sales tax:

Total Cash Collected = Sales Amount + Sales Tax = $240,000 + $19,200 = $259,200.

In accounting terms, the journal entry for this transaction would involve debiting cash for the total amount collected, crediting revenue for the sales amount, and recognizing a liability for the sales tax payable:

• Debit Cash: $259,200
• Credit Revenue: $240,000
• Credit Sales Tax Payable: $19,200

When the company eventually pays the sales tax to the government, it will debit the sales tax payable account to eliminate the liability and credit cash to reflect the outflow of funds:

• Debit Sales Tax Payable: $19,200
• Credit Cash: $19,200

This process ensures that the company accurately tracks its revenue and liabilities associated with sales tax. Understanding this distinction is crucial for proper financial reporting and compliance with tax regulations.

In accounting, companies sometimes do not track sales tax separately and instead reconcile their total cash receipts at the end of the month. To determine the actual sales revenue earned, they can use a specific formula that accounts for the sales tax collected. This formula is essential for accurately reporting revenue and liabilities related to sales tax.

The formula to calculate sales revenue is:

Sales Revenue = Total Cash Receipts / (1 + Sales Tax Rate)

In this formula, the sales tax rate must be expressed as a decimal. For example, a 5% sales tax would be represented as 0.05, making the calculation factor 1.05. This means that if a company collects a total of $210,000 in cash receipts, which includes both sales revenue and sales tax, the calculation to find the sales revenue would be:

Sales Revenue = $210,000 / (1 + 0.05) = $210,000 / 1.05

Calculating this gives:

Sales Revenue = $200,000

This indicates that out of the total cash collected, $200,000 is the actual revenue earned by the company, while the remaining $10,000 represents the sales tax payable to the government. This can be confirmed by calculating:

Sales Tax = Sales Revenue × Sales Tax Rate = $200,000 × 0.05 = $10,000

When recording this in the accounting books, the company would debit cash for the total amount collected ($210,000), credit sales revenue for the calculated revenue ($200,000), and credit sales tax payable for the amount owed to the government ($10,000). Eventually, when the company pays the sales tax, they will debit the sales tax payable account and credit cash for the amount paid.

Understanding this process is crucial for managing sales tax liabilities and ensuring accurate financial reporting. It is a common practice in business accounting, and familiarity with the formula and its application will be beneficial in future financial analyses.