Sales Tax also referred to as Value Added tax, is applied on most services and goods (Gilbertson and Lehman). It is an indirect tax that the ultimate customer bears. The company selling the goods or services to the customer collects this tax on behalf of the authority from the customers. The company thus acts as an agent for purposes of collecting sales tax. The company also pays tax for all purchases of services and goods from other suppliers. However, the tax authorities allow the company to recover any such tax paid on its purchases. The company pays or claims the difference between the sales tax it collects from customers (typically known as the output tax) and the tax it paid on making purchases (input tax). In the supply chain all suppliers normally pass on to the consumer the paid tax until the service or product is bought by the final consumer.
The sales taxes a company collects from customers and is yet to remit the same to the tax authorities are entered in the Sales Taxes Payable Account as a liability. This is because though, the entity collects the cash from the customers it only acts as an agent of the tax authorities and cannot therefore record the out tax as part of its sales revenue. The company will thus record the sales revenue excluding any sales tax it collects on behalf of the local authorities. The Sales Tax Payable is credited since sales tax is money owed to the authorities by the company collecting the tax (Gilbertson and Lehman).
In conclusion the Journal entry to reflect sales taxes is;
Works Cited.
Gilbertson, Claudia Bienias, and Mark W Lehman. Century 21 Accounting. Mason, OH: South-Western Cengage Learning, 2009. Print.
