What is Sales Taxes Payable?
Sales taxes payable refers to the liability account that is created when an entity collects sales taxes on behalf of the government and stores the aggregate amount of taxes before paying to the concerned taxes authority. In other words, the entity acts as the custodian of the sales taxes collected from customers and is obligated to remit the same to the government at regular interval of time.
Explanation
Sales taxesSales TaxesThe government levies sales tax on the consumption of various goods and services as the percentage added to the product and services from which the government earns revenue and does the company's welfare. In the United States, 38 different states have different taxes, from Alaska (1.76%) to Tennessee (9.45%).read more refers to the taxes collected by government tax authorities on the sale of certain goods and services. Typically, firms, companies, and individuals collect sales taxes from customers when they sell goods or services. Later they are required to remit the aggregate amount periodically to the appropriate tax authority. The time lag between the collection of sales taxes and remittance of the same result in the creation of a sales tax payable account, which is then recognized as a liability in the books of the concerned firms, companies, and individuals.
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For eg:
Source: Sales Taxes Payable (wallstreetmojo.com)
How to Record Sales Tax Payable?
It is fairly simple. In order to record credit sales in a sales journal, create a separate column for capturing it for each credit sale. Ensure that the aggregate of this column is recorded in the sales taxes payable account maintained in the general ledger at a regular interval of time.
Likewise, to record a reduction in sales taxes payable liability due to sales returns, create a separate column for sales returns. Ensure that the aggregate of this column is debited to the sales taxes payable account in the general ledgerGeneral LedgerA general ledger is a book of accounts that records the everyday business transactions in separate ledger accounts. The entries made in a ledger can be verified by getting a NIL balance on summing up all the ledger account amounts in the trial balance.read more at a regular interval of time.
Journal Entries
The journal entries for sales taxes payable are classified into two broad categories, which are as follows:
- At the time of collection of sales taxes from customers
- At the time of payment of sales taxes to the appropriate taxes authority
At the time of collection of sales taxes from customers – When a firm collects sales taxes after sales of certain goods or services, the following journal entry is made –
As a result of the above transaction, the cash balance (or trade receivableTrade ReceivableTrade receivable is the amount owed to the business or company by its customers. It is also known as account receivables and is represented as current liabilities in balance sheet.read more account for credit saleCredit SaleCredit Sales is a transaction type in which the customers/buyers are allowed to pay up for the bought item later on instead of paying at the exact time of purchase. It gives them the required time to collect money & make the payment. read more) rises, sales, as well as sales taxes payable, also increases.
At the time of payment of sales taxes to the appropriate taxes authority – When a firm remits the aggregate amount of the sales taxes to the concerned taxes authority the journal entry is made in the following way –
As a result of the above transaction, the outstanding amount of sales taxes payable on the liability side reduces by the same amount as the cash balance on the asset side.
Examples
Example #1
Let us take the example of ASD Inc. to illustrate the concept of a collection of sales taxes payable. The company executes only two sales during the second week of February 2020, which are as follows:
- 03, 2020: Cash sale of $10,000, which is subject to sales taxes of 4.5%.
- 05, 2020: Credit sale of $8,000, which is subject to sales taxes of 6.0%.
ASD Inc. operates in a state where it is required to remit the collected sales taxes to the appropriate taxes authority at the end of every week. However, the company didn’t remit the sales at the end of the above mentioned week. Prepare the journal entries for the two sales executed by the company in the first week of February 2020.
The journal entries for recording the sales executed during the first week of February 2020 are as follows –
Example #2
Let us take the same example of ASD Inc. to illustrate the concept of remittance of such tax payable. The company remits the sales taxes collected in the first week of February 2020 to appropriate taxes authority on March 05, 2020. Prepare the journal entry for the remittance of the sales taxes payable in March 2020.
The journal entry for recording the remittance in March 2020 is as follows –
How to Record on the Balance Sheet?
Sales Tax Payable is recognized as a liability that has to be usually paid within one year from the date of collection and so it is categorized under current or short-term liabilities. Therefore, the outstanding amount is reported under the current liabilities section of the balance sheet. Sometimes, it is combined with the payable trade account.
Recommended Articles
This has been a guide to Sales Taxes Payable and its definition. Here we discuss how to record sales tax payables along with examples and journal entries. You may learn more about accounting from the following articles –
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