Part D Recording
transactions and events
7: Sales tax
119
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
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