Acca f3 Financial Accounting (int) Study Text

Part D  Recording transactions and events

  7:  Sales tax

121

Question

Sales tax 

Are trade receivables and trade payables shown in the accounts inclusive of sales tax or exclusive of sales 

tax?

Answer

They are shown 

inclusive of sales tax, as the statement of financial position must reflect the total amount 

due from receivables and due to payables. 

A small element of sales tax is quite likely in questions. It is worth spending a bit of time ensuring that you 

understand the logic behind the way sales tax is accounted for, rather than trying to learn the rules by rote. 

This will ensure that even if you forget the rules, you will be able to work out what should be done. 

2.3 Payable for sales tax 

An outstanding payable for sales tax will appear as a current liability in the statement of financial position. 

The sales tax  paid to the authorities each quarter is the difference between recoverable input sales tax on 

purchases and output sales tax on sales. For example, if a business is invoiced for input sales tax of 

$8,000 and charges sales tax of $15,000 on its credit sales and sales tax of $2,000 on its cash sales, the 

sales tax payable account would be as follows. 

 SALES 

TAX PAYABLE 

 $  

$ 

Payables (input sales tax) 

8,000  Receivables (output sales 

Cash (payment to authorities)

9,000     tax invoiced) 

15,000

  Cash (output sales tax on cash sales) 

  2,000

17,000

17,000

Payments to the authorities do not coincide with the end of the accounting period of a business, and so at 

the reporting date there will be a balance on the sales tax payable account. If this balance is for an amount 

payable to the authorities, the outstanding payable for sales tax will appear as a current liability in the 

statement of financial position.

Occasionally, a business will be owed money back by the authorities, and in such a situation, the sales tax 

refund owed by the authorities would be a current asset in the statement of financial position. 

Question

Sales tax payable 

A business in its first period of trading charges $4,000 of sales tax on its sales and suffers $3,500 of sales 

tax on its purchases which include $250 sales tax on business entertaining. Prepare the sales tax payable 

account.

Answer

SALES TAX PAYABLE ACCOUNT 

$

$

Payables

3,250

Receivables

4,000

Balance c/d (owed to tax authorities)

   750

4,000

4,000

Balance b/d

750

Exam focus 

point

FAST FORWARD

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122

7: Sales tax   Part D  Recording transactions and events

The main points 

(a)

Credit sales (b) 

Credit purchases

(i)  

Include sales tax in sales day book; 

separately

(ii) 

Include gross receipts from 

receivables in cashbook; no need to 

show sales tax separately 

(iii) 

Exclude sales tax element from 

income statement 

(iv) 

Credit sales tax payable with output 

sales tax element of receivables 

invoiced

(i)  

Include Sales tax in purchases day 

book; show it separately 

(ii) 

Include gross payments in cashbook; 

no need to show sales tax separately 

(iii) 

Exclude recoverable sales tax from 

income statement 

(iv) 

Include irrecoverable sales tax in 

income statement 

(v) 

Debit sales tax payable with 

recoverable input sales tax element 

of credit purchases 

(c)

Cash sales (d) 

Cash purchases

(i)  

Include gross receipts in cashbook; 

show sales tax separately 

(ii) 

Exclude sales tax element from 

income statement 

(iii) 

Credit sales tax payable with output 

sales tax element of cash sales 

(i)  

Include gross payments in cashbook: 

show sales tax separately 

(ii) 

Exclude recoverable sales tax from 

income statement 

(iii) 

Include irrecoverable sales tax in 

income statement 

(iv) 

Debit sales tax payable with 

recoverable input sales tax element 

of cash purchases 

In sales tax questions, remember to check the tax rate used. If you are required to calculate sales tax, the 

rate will always to be given. 

Exam focus 

point

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Part D  Recording transactions and events

  7:  Sales tax

123

Chapter Roundup

Sales tax is an indirect tax levied on the sale of goods and services. It is usually administered by the local 

tax authorities. 

 

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.

 

Where sales tax is not recoverable, for any of the reasons described above, 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.

 

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. 

 

An outstanding payable for sales tax will appear as a current liability in the statement of financial position. 

Quick Quiz

1 

Sales tax is: 

 

A 

A direct tax levied on sales of goods and services 

 

B 

An indirect tax levied on the sales of goods and services 

 

C 

Administered by the Treasury 

 

D 

Charged by businesses on taxable supplies 

2 

Sales tax is due on all sales. Is this statement correct? 

 A Yes 

 B No 

3 

When sales tax is not recoverable on the cost of a motor car, it should be treated in which of the following 

ways?

 

A 

Deducted from the cost of the asset capitalised 

 

B 

Included in the cost of the asset capitalised 

 

C 

Deducted from output tax for the period 

 

D 

Written off to I/S as an expense 

4 

Purchases of goods costing $500 subject to sales tax at 15% occur. Which of the following correctly 

records the 

credit purchase?

 A Debit 

Purchases 

$500.00

  Debit 

Sales 

tax 

$75.00

  Credit 

Payables 

 

$575.00 

 B Debit 

Purchases 

$575.00

  Credit 

Payables 

 

$575.00 

 C Debit 

Purchases 

$436.78

  Debit 

Sales 

tax 

$65.22

  Credit 

Payables 

 

$500.00 

 D 

Debit 

Purchases 

$500.00

  Credit 

Sales 

tax 

 

$65.22 

  Credit 

Payables 

 

$434.78 

5 

A business purchases goods valued at $400. Sales tax is charged at 15%. The double entry to record the 

purchase is: 

 Debit 

........................................

$................

 Debit 

........................................

$................

 Credit 

........................................

  $................ 

6 

Fill in the blanks. 

 

Input sales tax is ........................................ , output sales tax is ........................................ . 

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