Accounting for Sales Tax on Receivables

Sales Tax

When a credit sale involves the application of sales tax, the receivable balance includes the amount of sales tax since it will be recovered from the customer. Sales is recorded net of sales tax because any sales tax received on the sales will be returned to tax authorities and hence, does not form part of income. Sales tax account is credited since this is the amount of tax payable that will be paid to tax authorities.

The accounting entry to record a credit sale involving sales tax will therefore be as follows:

Debit	Receivable (Gross Amount)
Credit	Sales (Net Amount)
Credit	Sales Tax (Payable) (Net Amount)

Subsequent receipt of dues from the customer will result in the following double entry:

When the receivable pays his due, the receivable balance will have be reduced to nil. The following double entry is recorded:

Debit	Cash (Gross Amount)
Credit	Receivable (Gross Amount)

Example

Bike LTD sells a mountain bike to XYZ for $115 on credit. Sales tax is 15%.

As the sale of $115 includes an element of sales tax, we need to first separate tax from the gross amount. Sales tax on the transaction may be calculated as follows:

Sales Tax: 115 x 15/115 = $15

Deducting sales tax from the gross sale revenue, we may now arrive at the tax exclusive sale value:

Tax Exclusive Sales: 115 - 15 = $100

This is the amount to be recognized as sales in the income statement. The accounting entry will therefore be as follows:

		$	$
Debit	XYZ (Receivable)	115
Credit	Sales		100
Credit	Sales Tax (Payable)		15

Upon receipt of the amount receivable from XYZ, following double entry will be made:

		$	$
Debit	Cash	115
Credit	XYZ (Receivable)		115

The sales tax payable of $15 will stand until it is paid to the tax authorities.