Introduction to Accounting: Tax Payable Account

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High School ・Accounting ・APA ・1 Sources

Do well to expantiate on why the account sales tax payable is credited when there is a sale made subject to a sales tax?
Tax is a source of revenue to the national governments and local authorities. Companies and retailers' sales can either be taxed or non-taxable. A sales tax refers to the percentage of the goods price, claimed by local or state authorities. However, taxed companies or retailers are ordered by the law, to record their business transactions in accounting books. Thereby, receiving their tax sales, which is later paid to the state or local authority. Sales taxes received by a firm on behalf of the state or local authority are reflected in the Sales Taxes Payable account of the business awaiting transfer to the respective authority. The accounting principle of double-entry must be observed when recording for the sales taxes in a firm. When a sale is made subject to a sales tax, the transaction affects the Cash or the Accounts Receivable Account, the Sales Revenue Account and the Sales Taxes Payable Account. When a sale is made, the trader debits the Cash or the Accounts Receivable Accounts with the total amount of the sale. The trader goes on to credit the Sales Revenue and the Sales Taxes Payable Account the amount of the sale minus the taxes payable and the sales taxes payable respectively. When the taxes payable are remitted to the relevant authority, Cash Account is credited the amount of tax payable while the Sales Taxes Payable Account is debited by the amount of sales taxes payable.

Conclusion

Sales taxes are treated as liabilities in the firm in that taxes are claims by outsiders (local or state authorities) in a business. Thus, sales tax payable is reflected as a credit entry in the accounting books.

References

Maritz, C. J. (2016). Introduction to accounting. Cape Town, South Africa: Edge Learning Media.

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