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

Most states enforce sales tax on some goods and services. If you sell a physical product or a service that isn’t exempt from sales tax, you may need to collect sales tax on sales within your state and possibly on sales outside of your state. Each state has different rules and requirements, so it’s best to check with the state you do business in to understand their requirements.

What is a credit sale?

There’s a 5% sales tax rate, meaning you receive $25 in sales tax ($500 X 0.05). If your sales returns and allowances account is high compared to your revenue account, you may be offering too many discounts or have a product quality issue. So, instead of adding it to your revenue, you add it to a sales tax payable account until you remit it to the government.

Types of Sales Transactions

Tina allows a 10% cash discount if goods are paid for within a month. On 4 January 2024, a business receives a cheque from Alex for $100 for an invoice. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. Initially, the specific details of the sale are identified, including the amount, whether the transaction is for cash or on credit, and the date of the sale.

Journal Entry for Sales and Purchase of Goods

You also have to make a record of your inventory moving and the sales tax. Sales are credit journal entries, but they have to be balanced by debit entries to other accounts. Imagine the company notices a sudden spike in the price of a critical raw material due to supply chain disruptions. Armed with this insight, the business can explore alternative suppliers, renegotiate contracts, or adjust pricing strategies to mitigate the impact on its bottom line. Similarly, by analyzing purchase records over time, the company can identify cost-saving opportunities, streamline procurement processes, and optimize inventory management.

It helps create an understanding of both active sales and future sales. It also affects the balance sheet through changes in cash or accounts receivable and equity (via retained earnings). Accurately recording this entry is essential for assessing the company’s performance, profitability, and financial health. In bookkeeping, accounting, and financial accounting, net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as Sales or Net sales.

1. And when you purchase products, you typically pay sales tax.
2. In recording a journal entry for sales, you’ll need to pass entry for sales—that is, move the information to all of the different accounts where it needs to be recorded.
3. Keeping an accurate record of your business’s sales is a must.
4. Just like with a cash sale, an entry may need to be made regarding sales taxes.
5. On 22 January, Tina is notified by her bank that Dave’s cheque has been dishonoured.

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

Based on the nature sales entry in accounting of the sale, the relevant accounts are determined. For cash sales, the Cash account is used, while credit sales involve the Accounts Receivable account. Let’s say your customer purchases a table for $500 with cash.

Tina balances this by making debit entries to Dave’s account totalling $500. The sale is recorded by debiting the appropriate asset account (Cash or Accounts Receivable) and crediting the Sales Revenue account. The debit entry increases the asset, reflecting the receipt of cash or the right to receive cash.

This brings the balance of your accounts receivable to zero. When journal entries are recorded for sales, debits and credits must be created for specific accounts. After they’ve been entered, the accounts should all balance out. If they don’t, mistakes will be found on the balance sheet. This is the best way to keep track of sales during your accounting period.

1. If Michael pays the amount owed ($10,000) within 10 days, he would be able to enjoy a 5% discount.
2. Some accounts are increased by debits and decreased by credits.
3. Without creating an update to accounts, your general ledger will be off.
4. Any time a sale is made, it needs to be recorded in your books of accounts.
5. After the customer pays, you can reverse the original entry by crediting your Accounts Receivable account and debiting your Cash account for the amount of the payment.
6. Credit sales boost the buyer’s inventory and also give them enough time to sell the product and repay their supplier.

It differs from the cash receipts journal in that the latter will serve to book sales when cash is received.1The sales journal is used to record all of the company sales on credit. Most often these sales are made up of inventory sales or other merchandise sales. Notice that only credit sales of inventory and merchandise items are recorded in the sales journal. Cash sales of inventory are recorded in the cash receipts journal. Both cash and credit sales of non-inventory or merchandise are recorded in the general journal.

When customers buy from you, you do not pay sales tax—customers pay sales tax. You simply collect and remit it to your state or local government (it passes through you). Let us understand how organizations maintain sales credit journal entry records with the help of a few of examples. The best way to record entries is by using flexible accounting software. Many accounting software options allow entries to be created both manually and automatically. Some even allow you to instantly make an accounting entry from a sales invoice.