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Chapter 13:
Sales tax
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What you will learn?
The nature of sales tax and how it is
collected
Accounting for sales tax
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Nature of sales tax
Definition
Sales tax
Sales tax is an indirect tax levied on the sale of goods
and services
Administered by tax authorities
Can have a number of rates
eg: standard rate, reduced rate...
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Nature of sales tax
How is sales tax collected ?
Sales tax is a cumulative tax, collected at various stages during
the life of goods or services
Example: Price net of Sales tax Total
sales tax 15% price
$ $ $
i) Manufacturer purchases raw
40 6 46
materials and components
ii) Manufacturer sells the completed
200 30 230
television to a wholesaler
The manufacture hands over to tax
24
authorities
i) Wholesaler purchases television 200 30 230
ii) Wholesaler sells television to retailer 320 48 368
Wholesaler hands over to tax
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authorities
i) Retailer purchases television 320 48 368
ii) Retailer sells television 480 72 552
Retailer hands over to tax
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authorities
Customer purchases television 480 72 552
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Nature of sales tax
Example: How is sales tax collected ?
The total tax of $72 is borne by the ultimate consumer but it is
collected on behalf of the tax authorities at different stages in
the products’s life
Supplier of materials and components 6
Manufacturer 24
Wholesaler 18
Retailer 24
Total sales tax paid 72
Sales tax does not affect the statement of profit or loss
(unless it is irrecoverable)
Simply being collected on behalf of tax authorities to whom a
payment is made
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Nature of sales tax
Input and output sales tax
Registered businesses
Charged output sales tax on sales
Suffer input sales tax on purchases
Output sales
The business pays the difference in
tax exceeds
tax to the authorities
input sales tax
Output sales
tax is less The tax authorities will refund the
input sales tax difference to the business
in a period
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Nature of sales tax
Irrecoverable sales tax
Some sales tax is irrecoverable
Must be regarded as part of the cost of the items
purchased
Included in the statement of profit or loss (SOPL) charge/
in the statement of financial position as appropriate
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Nature of sales tax
Example: Irrecoverable sales tax
A business pays $500 for entertaining expenses
Suffers irrecoverable input sales tax of $75 on this
amount
The total of $575 should be charged to the statement of
profit or loss (SOPL) as an expense
A business pays $5000 for a motor vehicle
Suffers irrecoverable input sales tax of $400
The business should capitalise the full amount of $5,400 as
a non-current asset in the statement of financial position
(SOFP)
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Nature of sales tax
Amounts inclusive and exclusive of tax
The gross amount of a sale/purchase is the amount inclusive of
sales tax
The net amount of a sale/purchase is the amount exclusive of
sales tax
Example:
Net amount exclusive of sales tax = $100
Sales tax = $100 x 15% = $15
Gross amount inclusive of sales tax = $100 + $15 = $115
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Accounting for sales tax
Statement of profit or loss
Sales tax charged on sales is collected by the business on
behalf of the tax authorities
It does not form part of the revenue of the business
Purchases Sales
Irrecoverable input sales
Statement of
tax: include Exclude
profit or loss
Recoverable input sales sales tax
(SOPL)
tax: exclude
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Accounting for sales tax
Example: Statement of profit or loss
Sales:
A business sells goods for $600 + sales tax $90 = total price $690
The sales account should only record $600 excluding sales tax
DR Cash or trade receivables $690
CR Sales $600
CR Sales tax control account (output sales tax) $90
Purchases (sales tax is recoverable)
A business purchses goods on credit for $400 + sales tax $60
DR Purchases $400
DR Sales tax control account (input sales tax) $60
CR Trade payables $460
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Accounting for sales tax
Exam focus point 1
Alana is not registered for sales tax purposes. She has recently
received an invoice for goods for resale which cost $500 before sales
tax, which is levied at 15%. The total value was therefore $575.
What is the correct entry to be made in Alana’s general ledger in
respect of the invoice?
A. Dr Purchases $500, Dr Sales tax $75, Cr Payables $575
B. Dr Purchases $575, Cr Sales tax $75, Cr Payables $500
C. Dr Purchases $500, Cr Payables $500
D. Dr Purchases $575, Cr Payables $575
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Accounting for sales tax
Exam focus point 1
Alana is not registered for sales tax purposes. She has recently
received an invoice for goods for resale which cost $500 before sales
tax, which is levied at 15%. The total value was therefore $575.
What is the correct entry to be made in Alana’s general ledger in
respect of the invoice?
D. Dr Purchases $575, Cr Payables $575
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Accounting for sales tax
Payable for sales tax
An outstanding payable for sales tax will appear as a current
liability in the statement of financial position
Example:
A business
invoiced for input sales tax $8,000
charges sales tax of $15,000 on its credit sales and sales tax
of $2,000 on its cash sales
SALES TAX CONTROL ACCOUNT
$ $
Payables 8,000 Receivables (output
(input sales tax) sales tax invoiced) 15,000
Cash (payment to 9,000 Cash (output sales tax 2,000
authorities) on cash sales)
17,000 17,000
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Accounting for sales tax
Exam focus point 2
The following information relates to Eva Co’s sales tax for the
month of March 20X3:
$
Sales (including sales tax) 109,250
Purchases (net of sales tax) 64,000
Sales tax is charged at a flat rate of 15%. Eva Co’s sales tax account
showed an opening credit balance of $4,540 at the beginning of the
month and a closing debit balance of $2,720 at the end of the
month.
What was the total sales tax paid to regulatory authorities during
the month of March 20X3?
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Accounting for sales tax
Exam focus point 2
$11,910
SALES TAX CONTROL ACCOUNT
$ $
b/d 4,540
Purchases 9,600 Sales 14,250
($64,000 x 15%) ($109,250 x 15%/115%)
Cash 11,910 c/d 2,720
21,510 21,510
