What is sales tax

Sales tax

* A sales tax  is added to the price of goods and services taken by customer

*A sales tax is a consumption tax  imposed by the government on the sale of goods and services.

* A conventional sales tax is levied at the point of sale, collected by the retailer and passed on to the government.

*Types of Sales Tax:

The concept of sales tax depends on the governing principles followed by governments, but there are some universal sales taxes applicable in most countries. The different types of sales taxes are mentioned below.

• Retail Sales Tax – This is a tax charged on sale of retail goods and is directly paid by the final consumer.
• Manufacturers’ Sales Tax – This tax is levied on the manufacturers of certain goods.
• Wholesale Sales Tax – This tax is levied on individuals who deal with wholesale distribution/sale of manufactured goods.
• Use Tax – This is a tax levied on the consumer for goods which are purchased without sales tax (generally from vendors who are not under the tax jurisdiction).
• Value Added Tax – This is an additional tax levied on all sales by certain govt.

*Accounting for Sales Tax

Since an entity is only collecting sales tax on behalf of tax authorities, output tax must not be shown as part of income. Therefore, sales revenue is shown net of any sales tax received from customers. The accounting entry to record the sale involving sales tax will therefore be as follows:

Debit	Cash / Receivable (Gross Amount)
Credit	Sales (Net Amount)
Credit	Sales (Tax Amount)

The accounting entry to record the purchase involving sales tax will therefore be as follows:

Credit	Trade payable (Gross Amount)
Debit	Purchase (Net Amount)
Debit	Sales (Tax Amount)

The receivable 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.

Where the initial sale was made on credit, subsequent receipt of dues from the customer will result in the following double entry:

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

Sales Tax 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          = $15   (115*15/115)

net sales          =$100  (115-15)

gross amount   =115

Calculation of sales tax

1.including amount=15 (115*15/115)

2.excluding amount=15 (100*15/100)

*including amount means list price,gross amount, invoice amount 

*excluding amount means net amount, cost plus net 

Note :sales tax must be calculated after deducting trade discount