Acca f3 Financial Accounting (int) Study Text

Part D  Recording transactions and events

  7:  Sales tax

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1.3 Input and output sales tax

Sales tax charged on goods and services sold by a business is referred to as 

output sales tax. Sales tax 

paid on goods and services 'bought in' by a business is referred to as 

input sales tax. 

If output sales tax  exceeds input sales tax, the business pays the difference in tax to the authorities. If 

output sales tax is less than input sales tax in a period, the tax authorities will refund the difference to the 

business.

The example above assumes that the supplier, manufacturer, wholesaler and retailer are all sales tax 

registered traders. 

A sales tax registered trader must carry out the following tasks. 

(a) 

Charge sales tax on the goods and services sold at the rate prescribed by the government. This is 

output sales tax. 

(b) 

Pay sales tax on goods and services purchased from other businesses. This is input sales tax. 

(c) 

Pay to the tax authorities the difference between the sales tax collected on sales and the sales tax 

paid to suppliers for purchases. Payments are made at quarterly intervals. 

1.4 Irrecoverable sales tax

There are some circumstances in which traders are not allowed to reclaim sales tax paid on their inputs. In 

these cases the trader must bear the cost of sales tax and account for it accordingly. So the cost of 

expenses and any non-current assets purchased will include any irrecoverable sales tax. 

Where sales tax is not recoverable it must be regarded as part of the cost of the items purchased and 

included in the I/S charge or in the statement of financial position as appropriate. 

2 Accounting for sales tax

Registered businesses charge output sales tax on sales and suffer input sales tax on purchases. Sales tax 

does not affect the income statement, but is simply being collected on behalf of the tax authorities to 

whom a quarterly payment is made. 

2.1 Income statement 

A business does not make any profit out of the sales tax it charges. It therefore follows that its income 

statement figures should not include sales tax. For example, if a business sells goods for $600 + sales tax 

$90, ie for $690 total price, the sales account should only record the $600 excluding sales tax. The 

accounting entries to record the sale would be as follows. 

DEBIT 

Cash or trade receivables 

$690 

CREDIT Sales 

  $600 

CREDIT 

Sales tax payable (output sales tax)  

 

$90 

If input sales tax is recoverable, the cost of purchases should exclude the sales tax  and be recorded net of 

tax. For example, if a business purchases goods on credit for $400 + sales tax $60, the transaction would 

be recorded as follows. 

DEBIT Purchases 

$400

DEBIT 

Sales tax payables (input sales tax recoverable) 

$60

CREDIT Trade 

payables 

  $460 

If the input sales tax is not recoverable, the cost of purchases must include the tax, because it is the 

business itself which must bear the cost of the tax. 

Key term 

FAST FORWARD

FAST FORWARD

FAST FORWARD

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120

7: Sales tax   Part D  Recording transactions and events

Purchases Sales 

Income statement  Irrecoverable input sales tax: include   Exclude sales tax 

Recoverable input sales tax: exclude   

2.2 Sales tax in the cash book, sales day book and purchase day book 

When a business makes a credit sale the total amount invoiced, including sales tax, will be recorded in the 

sales day book. The analysis columns will then separate the sales tax from the sales income of the 

business as follows. 

Sales

Date Total 

income

Sales tax

$ $ $ 

A Detter and Sons 

230 

200 

30 

When a business is invoiced by a supplier the total amount payable, including sales tax, will be recorded in 

the purchase day book. The analysis columns will then separate the recoverable input sales tax from the 

net purchase cost to the business as follows.

Date Total 

Purchase

Sales tax

$ $ $ 

A Splier (Merchants) 

184 

160  

24 

When receivables pay what they owe, or payables are paid, there is 

no need to show the sales tax in an 

analysis column of the cash book, because input and output sales tax arise when the sale is made, not 

when the debt is settled. 

However, sales tax charged on 

cash sales or sales tax paid on cash purchases will be analysed in a 

separate column of the cash book. This is because output sales tax has just arisen from the cash sale and 

must be credited to the sales tax payables in the ledger accounts. Similarly input sales tax paid on cash 

purchases, having just arisen, must be debited to the sales tax payable. 

For example, the receipts side of a cash book might be written up as follows. 

Analysis columns

 

 

 

 

 

Output sales

 

 

 

Sales

Cash

tax on cash

Date

Narrative

Total

ledger

sales

sales

$

$

$

$

A Detter & Sons

230

230 

 

 

Owen

660

660 

 

 

Cash sales

322

280

42

Newgate Merchants

184

184

Cash sales

     92

  80

12

1,488

1,074

360

54

The payments side of a cash book might be written up as follows. 

 

 

 

Analysis columns

 

 

 

 

Cash

 

 

 

 

purchases

Input sales

 

 

 

Purchase

and sun-

tax on cash

Date

Narrative Total 

ledger

dry items

purchases

$

$

$

$

A Splier (Merchants)

184

184 

 

 

Telephone bill paid

138

120

18

Cash purchase of stationery

46

40

6

Sales tax paid to tax authorities 

1,400

1,400

1,768

184

1,560

24

Exam focus 

point

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