Accounting for Sales Tax: What Is Sales Tax and How to Account for It (2024)

FAQs

Accounting for Sales Tax: What Is Sales Tax and How to Account for It? ›

The journal entry for sales tax is a debit to the accounts receivable or cash account for the entire amount of the invoice or cash received, a credit to the sales account and a credit to the sales tax payable account for the amount of sales taxes billed.

To record received sales tax from customers, debit your Cash account, and credit your Sales Revenue and Sales Tax Payable accounts. When you remit the sales tax to the government, you can reverse your initial journal entry. To do this, debit your Sales Tax Payable account and credit your Cash account.

Sales tax is NOT an expense so no sales tax expense should be reported on P&L. The amount collected for Sales tax should NOT be included in any of revenue line items. Again, no sales tax revenue reported on P&L either. Sales tax should be kept separately as a liability account on your books reported on Balance Sheet!

Sales tax and use tax are usually listed on the balance sheet as current liabilities. They are both paid directly to the government and depend on the amount of product or services sold because the tax is a percentage of total sales. The sales tax and use tax depend on the jurisdiction and the type of product sold.

Capitalized Costs for Fixed Assets

2 The company can also capitalize on other costs such as labor, sales taxes, transportation, testing, and materials used in the construction of the capital asset. 3 Any subsequent maintenance costs must be expensed as incurred after the fixed asset is installed for use, however.

Gross sales is your total sales before numerous categories of expenses are deducted, such as returned items, taxes, license and business fees, rent, utility bills, payroll, the cost of retail items purchased to be resold, or any other costs that a business can expect to incur.

Basically, the company making the sale and collecting the sales taxes is an agent for the state and local government. Therefore, the sales taxes collected are not part of the seller's sales or revenues.

If you provide services that are subject to sales tax, you would likely include the sales tax in your service fees and would therefore classify it as an operating expense. Ultimately, it is up to your business to decide which expense category is most appropriate for sales taxes.

Where do taxes go in P&L? ›

Income taxes are reported as an expense, and appear on the line prior to the net income calculation. You would include federal, state and local taxes, but not property taxes. The latter is deductible, and appears as an operating expense as part of overhead.

The sales tax should be recorded as a separate expense in the financial statements. The visual below is a reminder that only a buyer would record sales tax expense. If you are a seller of good or services, you would not record any sales tax expense for the sale of those goods or services.

Payment of sales tax is on an accrual basis and not on a cash basis. Sales tax must be reported and paid with the return for the period in which the sale occurs.

The journal entry for sales tax is a debit to the accounts receivable or cash account for the entire amount of the invoice or cash received, a credit to the sales account and a credit to the sales tax payable account for the amount of sales taxes billed.

Don't forget, in terms of depreciation, that your cost basis of an asset should include not only the purchase price, but also additional costs like sales taxes, freight charges, and any installation and testing fees.

Examples of fixed costs: mortgage and loan payments, insurance premiums, rent, salaries, cell phone bills, property taxes, vehicle license. Examples of variable costs: hourly wage payments, sales commissions, taxes on income and sales, fuel, raw materials, utilities.

Which Expense Category is Sales Taxes? There is no definitive answer to this question as it depends on how your business operates and what accounting method you use. However, sales taxes could be classified as either a cost of goods sold (COGS) or an operating expense.

The sales taxes collected by a merchant are not part of the merchant's sales and are not part of the merchant's expenses. Instead, the merchant is merely an agent of the state and will record the sales taxes collected in a current liability account such as Sales Taxes Payable.