How to Record Sales Tax
How is the collection and remittance of sales tax recorded on your books? We break down the basics and not so basics in this post.
The basic sales tax workflow is as follows:
Sales tax is collected with your sales, the sale price of the item/service is recorded to revenue. On the other hand sales tax is recorded to a liability account.
When sales tax is remitted the liability account is decreased
Sales tax should never hit the revenue and expense accounts
Let's break this down a little futher:
The Collection of Sales Tax
Sales tax is not considered income for the company. Rather it is a tax imposed by local, state, and federal governments on items/services that are sold. The sales tax is added onto the top of the sales price. Because of this the sales tax comes into a liability account. A liability account is used to record an amount that a company owes another entity/person. In this case the sales tax is owed to a government entity. The entry for a sale with sales tax looks like:
Debit cash for the total amount received (or accounts receivable if the client promises to pay later)
Credit a sales/revenue account for the sale amount
Credit sales tax liability for the sales tax amount
Your debits and credits still equal in this case, the full amount is just not being recorded to a revenue/income account.
The Remittance of Sales Tax
The remittance process is much easier, the liability account is decreased for the amount that is paid. This shows that the company no longer owes that amount to another entity. The entry would look like this:
Credit to cash for the amount that is paid
Debit sales tax liability
Your debits and credits equal here as well.
Let Your Accounting Program Help You
You don't necessarily need to be making journal entries to record these transactions. Many accounting programs will have a tool set up to help you navigate this entry. Understanding the entry behind the scenes will help you detect if there are mistakes.
Who Should be Paying Sales Tax?
Sales tax is a complicated situation now that laws have changed. Take a look at our break down of sales tax along with some helpful resources in this blog post.