Sales Tax Payable - Online Tutor, Practice Problems & Exam Prep

Sales tax is a percentage added to the sales price, collected by companies and remitted to the government. For example, with an 8% sales tax on $240,000 in sales, the total cash collected is $259,200, comprising $240,000 in revenue and $19,200 in sales tax payable. Companies may also reconcile total cash receipts to determine sales revenue using the formula: Total Cash Receipts1+Sales Tax. Understanding these concepts is crucial for accurate accounting and financial reporting.

Sales Tax Payable

Now let's learn about sales taxes. So, sales taxes are based on a percentage of the sales price, and the customer is going to be paying for this. Right? Maybe you live in a state like New Hampshire, where you have the luxury of seeing a price tag of $1 and you actually pay $1. Well, most of us don't have that luxury, and you're probably going to have to learn this anyway. So let's go ahead and see how we account for our sales taxes. Right. So, like I said, these sales taxes are going to be based on a percentage of revenue, right? There's going to be the revenue that the company earns and there's some percentage given to you in the problem that you're going to have to calculate the sales tax. And remember, it's the customer who's paying for the sales tax. Think about when you go to the store and you see something that says it's $5. Well, you take it to the cash register, you don't pay $5. You pay like $5 and 30 cents or something. Right? You pay a little extra, and that's the sales tax. So it's the customer that's paying the sales tax, but it's the company that's collecting the sales tax and then remitting it to the government, sending it to the government, right? So, when you think about it, this sales tax that the customer is paying, it's extra cash coming into the company, but it's not revenue. Right? These sales taxes are not revenue to the company because they're just collecting it and then giving it to the government. It's going to be revenue for the government, but not for the company. So let's go ahead and see how we deal with these sales taxes in this example right here.

The State of Oak, Nebraska imposes an 8% sales tax on all sales. So there you go, this is always going to happen. They're going to give you what the sales tax percentage is, and we're going to use that with our revenue to calculate our sales taxes. During the month of September, Oak Nebraska Riding Company made $240,000 in sales. Sales of $240,000. Okay? So when we didn't have sales tax, we usually had an entry. Let's say it was all received in cash. There was no accounts receivable. Well, we would have debited cash, right? Because we received cash. And we would have credited revenue, right? It's still going to be similar, except we're collecting a little more cash now, right? It's not just the revenue that we're collecting in cash. We're also collecting the sales tax amount. So let's see how this works. Let's see first how much the sales tax is, right? So the sales tax, well, that's going to be the amount of sales, $240,000 multiplied by the 8%, 0.08 in sales taxes, right? 8% of all sales. So $240,000 times 0.08, well, that's going to come out to $19,200, right? $19,200 is the amount extra that we collected to remit to the government. Cool? So how much cash did we actually collect? The cash actually collected well, it's the $240,000 in sales plus the $19,200 in taxes. So the total cash is going to be $259,200. Right? That's the total of our revenue plus the sales tax we collected. So that's what we would have in our journal entry. That's the amount of cash that actually came in. So we would debit cash for $259,200. So that would be our debit. And then we have our credit to revenue for the amount of revenue we had, right? It wouldn't be the whole $259,200 because that's not all revenue. We would only have revenue of $240,000 just like before. So what's going to be the rest of our credit here? Well, we have this money that's not ours. We owe this money to the government, right? We collected this money, and we're going to have to pay it to the government, so we have a liability. And we're going to have a liability, sales taxes payable. Sales tax payable. Okay, so now we have this liability to pay this $19,200 to the government. And eventually, when we pay the government, so I'll put over here eventually. Oh, we actually do this below. Perfect. I'm getting ahead of myself. So this is the entry we would make when we collect the money, right? Every time we collect, we're going to increase our liability to the government, and we're going to have our revenue and the cash we collected. So we would have these journal entries, and we would see that we would have our cash, right? Our cash is going up $259,200 for all the cash we collected. Our liabilities for the sales tax payable, I'm going to put ST for sales tax there. The liabilities are going up $19,200, and the revenue increases our equity, right? This is going to go through our retained earnings, and this is going up $240,000, so this stays balanced here. Now eventually, we're going to have to pay that money to the government, and that's what I almost got ahead of myself here. So this is our second entry, so eventually, when we pay the government, ORC remitted the sales tax collected to the government at the end of the month. So what does this do? It gets rid of the liability, right? We were liable. We had liability to pay the government the $19,200, and now we finally did it. So this is what we're going to do. We're going to get rid of the liability with a debit. Sales tax payable gets rid of the liability in the full amount because we paid them the full amount $19,200. And how did we pay them? With that extra cash we collected, right? That extra cash, $19,200. So you can imagine after this journal entry, well, we're just left with our revenue that we earn. The cash from the revenue that we earn, right? The $240,000 is left over. So our cash here is going down $19,200. And the liability, the sales tax payable, that's going away as well. $19,200. So the liability is off our books and that extra cash we collected is gone as well.

Alright? So it's not so complicated to deal with sales taxes. You just have to remember that there's the revenue portion and then we collect a little extra which is the sales tax, which is a liability until we pay it to the government. Okay? So let's pause here and we'll continue to see that. So we'll continue to see that liability until we pay it to the government, okay? So let's pause here, and we'll continue with another little tidbit about sales tax in the next video.

Sales Tax Payable:Total Cash Receipts

So sometimes a company doesn't keep track of the sales tax separately. They just make a reconciliation at the end of the month based on how much total cash they collected. They know what the sales tax percentage is, they know how much total cash they collected. So they use this formula in green right here to back into the sales revenue. Right? Remember, the sales revenue is the amount of revenue the company actually earned. But they also collected a little extra cash which is supposed to go to the government. So here's our formula. We take the total cash receipts, so in this case, they are not keeping track of just revenue. They are just counting all the cash that came in. They are looking in the cash register and they say, hey we collect this much cash. And then at the end of the month, they're going to reconcile and make their journal entry for the liability for sales taxes. Okay? So they take their total cash receipts and divide by 1 plus the sales tax and that tells you what the sales revenue is. Okay? So 1 plus the sales tax, remember that has to be as a decimal. We have to treat this sales tax as a decimal. So it's going to be like 1.08 or 1.1 or 1.03 depending on whatever the sales tax is.

So let's go ahead and see, in an example how this works. The state of Colorado, Florida imposes a 5% sales tax on all sales. During the month of September, total cash receipts at Colorado Fornia ski shop were $210,000 Okay, so notice they told us total cash receipts. They didn't say they made this much in revenue. They said, okay, including the revenue and the sales tax we collected, it was a total of $210,000. Okay? So when we make our journal entry, we know that the cash collected, the debit is gonna be $210,000, right? And we're gonna have revenue still, but it's not the total $210,000 because included in that is the sales tax.

We're gonna have revenue and we're gonna have the sales tax payable, but we have to figure out what each of those are, right? We know the total amount of cash collected; now we need to split it up between the sales tax and the revenue. So let's use our formula over here. We have the sales revenue is gonna equal total cash receipts of $210,000 divided by 1 plus the sales tax. So you should start to get comfortable with just seeing when we do 1 plus a percentage to be able to say that this is gonna be 1.05, right? Because this 5%, that's 0.05. So I want you guys to get comfortable with just doing 1 plus a percentage to just be able say 1.05. But just to see it, we would have 1+0.05, right? Because that's the 5 percent. So that'd be 210000÷1.05, right? And you're gonna be doing 1 plus a percent throughout all your business classes. It's gonna come up really often. So you're gonna wanna get comfortable with that. So 210000÷1.05, well, that comes out to 200,000. So that means that our sales revenue was 200,000 and you can confirm that the that off of that 200,000, if we did 200000*0.05. Well, there you go. You'd have the 10,000 that's in sales taxes. So 200,000 was our revenue, that means the sales taxes were the other 10,000, right? So that should make sense right there. 200,000 and then 10,000 in the payable and eventually, that liability, the sales tax payable, is going to go away when we give the extra cash to the government. So eventually, we'll have another entry just like above where we debit the liability, the sales tax payable for the 10,000 and we'll credit cash for the 10,000 when we pay the government. Cool?

So this is another way they like to do this because it's a little trickier, it's a little more involved of a formula, but in the end, it's not so crazy. So let's go ahead and do some practice problems for sales tax payable, and let's start that up in the next video.

Blue Skies Supplies does not keep separate records of revenues and sales taxes at the time of sale. The register totals for October 21 are $20,776. All sales are subject to a 6% sales tax. If all cash receipts were originally included in Sales Revenue, the journal entry to adjust for sales taxes payable would include:

• A. A debit to Sales Taxes Payable for $1,176
• B. A debit to Sales Tax Expense for $1,246
• C. A credit to Sales Taxes Payable for $1,176
• D. A credit to Sales Taxes Payable for $1,246

Crystal Company does not segregate sales and sales taxes in its register. The register total for May 5 is $27,560, which includes a 6% sales tax. Prepare the journal entry to record the sales and related taxes.

Crystal Company does not segregate sales and sales taxes in its register. The register total for May 5th is $27,560, which includes a 6% sales tax. Prepare the journal entry to record the sales and related taxes. Alright, so again, this is a problem where they are not keeping track of revenue separately. We've got a total cash collected, and we need to back into our sales revenue and into our sales tax payable. For our journal entry, we know that we're going to have cash. We're going to debit cash because we collected cash of $27,560, but we are going to have to split that receipt of cash into the revenue that the company actually earned and the sales taxes payable that it owes to the government. Okay? So those are going to be our two credits. We're going to have revenue and a liability for the sales tax payable. So let's use our formula. We had our sales revenue formula. We're going to back into the sales revenue from the total cash collected. So we have $27,560 in cash collected, and we're going to divide that by 1 plus the sales tax percentage, which is 6% here. So it's going to be 1.06, right? 1 + 0.06, which is 1.06. All right? So let's see what that comes out to. $27,560 divided by 1.06, that comes out to $26,000. That means our sales revenue is $26,000, and the remainder of the cash received, well, that's going to be sales taxes payable. Alright? So we know that our revenue now is $26,000, so that's that part of the journal entry, and the remainder is going to be sales tax payable. So let's see what that amount is. Sales tax, well, that's going to be the total cash received of $27,560 minus the $26,000 that was revenue. So that comes out to $1,560. $1,560 is our sales taxes. So there we go, that's going to be our liability right there, $1560, cool? And you can always double-check this by going to the revenue once you've gotten your revenue of $26,000. If you do $26,000 times 6%, so $26,000 times 0.06, well, you're going to get $1,560, right? So we had $26,000 in revenue, and we multiply that by the sales tax percentage, and we're going to get that same number, $1,560. Cool? Alright. So that's our journal entry right there. We're going to debit cash for the total cash collected, credit revenue for the $26,000, and sales tax payable is a liability until we pay it off to the government, alright? Let's go ahead and move on to the next one.

ABC Company sold subscriptions to customers based on the following timeline: 

September 1 Sold one-year subscriptions, collecting cash of $3,600, plus sales taxes of 10%.
October 31 Paid the sales taxes to the state taxing authority.
December 31 Recorded necessary year-end adjusting entries 

Prepare journal entries for each of the events provided.

Alright. Let's see how you guys did with this one. It might be a little tricky because we're dealing with unearned revenue. Let's see how you did. ABC Company sold subscriptions to customers based on the following timeline and we've got 3 dates here. Prepare journal entries for each of the events provided. So let's go ahead and go one by one. Let's start with the September 1st journal entry. So September 1st what happened? Sold 1 year subscriptions collecting cash of $36,000 plus sales taxes of 10%. Okay? So on September 1st, we collected cash of $3,600, excuse me, $36,000 plus 10% of that in cash. So it's actually we collected a little more cash, right? Because it says $36,100 in cash. Well, that's going to be our revenue plus sales taxes of 10%. Okay? So you got to read into it a little bit and make sure we get it just right. So what is this going to mean to us? Well, we know our revenue. This is going to be our revenue right here because we collected that much in cash for our revenue and then it says plus sales taxes, so we collected a little extra in cash. So our sales tax it's going to be $36,100 times 10%, so 0.10 and that's going to be $3,610, right? That's going to be the sales taxes that we owe to the government. So what's our total cash collected? Cash? Well, it's going to be the $36,100 that we got in revenue plus the $3,610. So that comes out to $39,710, right? $39,710 is the total cash collected which includes the $36,100 for the actual subscriptions and then the other $3,610 which was sales taxes. Now we've got a little bit of a trick here because this isn't actually revenue yet. Let's think about it. Our cash collected was $39,710, but now instead of crediting revenue, think about what we sold here. We sold a 1 year subscription, right? So you can imagine this is a magazine and we sold a subscription upfront, but have we earned that revenue yet? We haven't given any magazines to the customers, right? We're going to be giving magazines maybe month over month for the next year. So we haven't earned any of that revenue. If we don't end up delivering magazines to the customer, they're going to get upset and we're going to have to give them a refund. So we haven't earned any revenue, we have a liability to the customer to supply magazines or whatever they're subscribed to in the future. So instead of crediting revenue itself, we haven't earned the revenue so it's not revenue yet, it's unearned revenue. So we have to credit a liability for unearned revenue. So we're going to credit unearned revenue instead of revenue in this problem and that's going to be the $36,100 that the company collected for their magazine subscriptions or whatever they're selling. And the rest of it is going to be the sales tax payable, right? So in this case, we don't have revenue yet. We have 2 liabilities. We have the liability of $36,100 to deliver magazines to the customer and then we also have the liability to give cash to the government. So we haven't earned any revenue at this point. We're going to earn that revenue over time as time passes and the subscription begins to expire. Okay? So that's going to be our entry on September 1st. We collected cash, we have unearned revenue until we until time passes and we start delivering the product. And finally, the sales tax payable. So 2 liabilities there. Let's move on to the October 31st entry. So October 31st, what was the event on Halloween? Well, we paid the sales taxes to the state taxing authority. What a spooky Halloween event. Okay? So the sales taxes got paid to the taxing authority. Debit sales tax payable. For it. So we're going to debit sales tax payable in the amount of $3,610, right? This is the amount we owed to the government and we finally paid them. So we're going to credit cash for $3,610, that's the amount that we paid them. So that entry is pretty simple, that's just us paying off our liability. And now what happens on December 31st? We need to record necessary year-end adjusting entries. So what year-end adjusting entry might we have here? It's going to be for that unearned revenue, right? We've earned some of the revenue. We sold the subscription on September 1st and now it's December 31st. Some time has passed and we've earned some revenue, Okay? So let's go ahead and see how much revenue we've earned. So this will be the December 31st entry. Let's think about how much revenue we've earned. This is a 1 year subscription, right? So we're going to earn 1/12th of that per month. So let's see how much we earn every month. We're going to have $36,100 in total sales and we're going to divide that by 12 months. So $36,100 divided by 12, that's $3,008.33 per month that we're earning, right? So let's go ahead and see how many months have passed, so $3,008.33 per month. Well we've got September, we earned our revenue. October, we earned November December. We've earned 4 out of the 12 months of revenue, right? This subscription is going to last a year. Well, we've earned 4 months out of those 12 months, so we've earned about $12,033.32 in earned revenue. So as time keeps passing, we're going to keep earning more and more of that revenue until we have no more unearned revenue and it is all earned revenue. So what's going to be our entry here? Well, we're going to have to debit unearned revenue, right? We need to lower that liability because we're no longer liable for a whole $36,100 worth, we've earned some of it. So we're going to debit unearned revenue in the amount of $12,033.32. What do you think our credit's gonna be here? Well, we earned the revenue, so we're going to have a credit to revenue. Right? We have the earned revenue which is actually going to go to the income statement. And that's going to be in the amount of $12,033.32 as well. Okay? So if you guys are struggling with the unearned revenue and earning revenue, I suggest you go back to our adjusting entries that we studied earlier and review the video on unearned revenue. And remember that over time, we're going to be earning the revenue as the time passes or as we deliver products to the customer, it all depends, okay? So this is about it for this question. We've got our 3 entries. First, when we collect the cash, then we have our remittance to the government, and then finally, an adjusting entry for our unearned revenue. Cool? Let's go ahead and move on to the next video.

Here’s what students ask on this topic:

What is sales tax payable and how is it recorded in accounting?

Sales tax payable is a liability account that represents the amount of sales tax a company has collected from customers but not yet remitted to the government. When a sale is made, the company collects the sales tax from the customer and records it as a liability. For example, if a company makes $240,000 in sales with an 8% sales tax, the total cash collected is $259,200. The journal entry would debit cash for $259,200, credit revenue for $240,000, and credit sales tax payable for $19,200. Eventually, when the company remits the sales tax to the government, it will debit sales tax payable and credit cash for the amount of the tax.

How do you calculate sales tax from total cash receipts?

To calculate sales tax from total cash receipts, you can use the formula: $\frac{\mathrm{Total} \mathrm{Cash} \mathrm{Receipts}}{1+\mathrm{Sales} \mathrm{Tax}}$. For example, if the total cash receipts are $210,000 and the sales tax rate is 5%, you would divide $210,000 by 1.05 to get the sales revenue, which is $200,000. The sales tax payable would then be $210,000 - $200,000 = $10,000.

Why is sales tax not considered revenue for a company?

Sales tax is not considered revenue for a company because it is collected on behalf of the government. The company acts as an intermediary, collecting the tax from customers and then remitting it to the government. The sales tax collected is recorded as a liability (sales tax payable) and not as revenue. Revenue represents the actual earnings from the sale of goods or services, whereas sales tax is an additional amount collected that the company is obligated to pass on to the government.

What journal entries are made when sales tax is collected and remitted?

When sales tax is collected, the journal entry is: Debit Cash and Credit Revenue and Sales Tax Payable. For example, if a company makes $240,000 in sales with an 8% sales tax, the entry would be: Debit Cash $259,200, Credit Revenue $240,000, and Credit Sales Tax Payable $19,200. When the sales tax is remitted to the government, the entry is: Debit Sales Tax Payable and Credit Cash. For the same example, the entry would be: Debit Sales Tax Payable $19,200 and Credit Cash $19,200.

How do companies reconcile sales tax at the end of the month?

Companies reconcile sales tax at the end of the month by comparing the total cash receipts to the sales revenue and sales tax collected. They use the formula: $\frac{\mathrm{Total} \mathrm{Cash} \mathrm{Receipts}}{1+\mathrm{Sales} \mathrm{Tax}}$ to determine the sales revenue. For example, if total cash receipts are $210,000 and the sales tax rate is 5%, the sales revenue is $200,000, and the sales tax payable is $10,000. The company then makes the necessary journal entries to record the liability and eventually remits the tax to the government.