Sales tax to a payable account
Explain why the account Sales tax Payable is credited when a sale is made subject to a sales tax?
As a way of introduction, tax is the national government's and other local authorities source of revenue. Sales tax is a type of tax claimed by local or state authorities as a portion of the sales price of goods or services. However, some products are taxable, while others aren't. In a situation where a company or retailer sells taxable goods, the company or retailer will receive a sales tax which is later remitted to the treasury of either the state or local authority. Owing to the regulations imposed on businesses, all business transactions must be accounted for and reflected in the respective accounting books.
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.
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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