Sales evaluation for accounting and tax

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all right in this lesson we're gonna be looking at sales tax payable so sales tax payable is something that maybe you are very familiar with if you are in one of those jurisdictions or states it doesn't have sales tax you might not know what we're talking about but we're gonna clue you in and show you how we booked that into the books of a company who's collecting sales tax from their customers so let's get diving into sales tax so sales tax is a type of taxes levied on the sale of goods and services we are now seeing more and more services being taxed with sales tax he used to be only on goods and not services but but because of how much services or non hard good related sales there are it's just an opportunity for states and local governments to collect more taxes or they're taxing services more and more now in the United States sales tax is assessed at the retail value of the goods or services to the end-users so you might hear something called that value-added tax that is in other countries a version of sales tax but the way that that works is that every incremental step in the process of making the product is taxed so that at the end of the day all the tax has been collected by the time it's sold to that end user now that end user is going to pay some type of that tax as well but it's a little bit different in the United States that product is not taxed until it's finally sold to its third party or to its end user so me or you if we go to a store buying a product so works a little bit different than other countries but basically if you're buying a good and you're using that good you're gonna be charged as sales tax now if a business buys the good and then resells it to someone else who will then sell it to the end user that business doesn't collect sales tax because they are not selling to the end user judge they're just selling it as a middleman to another company who will sell it to that end user so whoever uses it that's when the sales tax assess yeah now sales tax is collected by the end seller of the goods to the end-user so if I manufacture a product and I sell it to Best Buy let's say I'm not the end seller so I'm not gonna collect sales tax but Best Buy is gonna be the inside because they're gonna sell it to the end-user sales tax is a liability to the company who collects them the company will remit the sales tax to the government agency and an interval basis so depending on what state you're in and depending on how much sales you do is going to dictate when that payment is made to the state or local government as such sales tax is not considered revenue to the company that collects it they simply is just going to collect it and book a liability and then remit that cash to the state or local agency whoever's collecting the sales tax will remember sales tax is not a revenue even though it's collected by the company so let's look at an example here just so that you know how it's calculated and then how we book it into our book so assume company a sells two hundred and twenty thousand dollars of product to customers during the month the company collects sales tax in the amount of 8.25% prepare the journal entry for the sale look good ignore the cost of goods sold at this point and assume all all of the customers paid in cash so first thing that we need to do is figure out how much sales tax we're gonna have to collect on behalf of the local government or the state government when we apply in 8.25% so to do that we're gonna take the sales amount and multiply it by this tax rate so two hundred and twenty thousand dollars times eight point two five percent gets us 18 thousand one hundred and fifty dollars so we're gonna collect or we have collected eighteen thousand one hundred fifty dollars from our customers in the for sales tax so now the question is what's the journal entry so the first thing we got to ask yourself is how much cash are we going to clutch well we're gonna selector 220 and then we're also going to collect our 18 150 from our customers so if we combine that we get two hundred and thirty-eight thousand one hundred and fifty dollars and we receive that in cash so we'll receive it in cash we are going to debit cash so debit cash in the amount of two hundred and thirty eight thousand one hundred and fifty dollars that's the two hundred and twenty of sales that we received and in the eighteen 150 from the sales tax now the question is what's the rest of the journal entry so how do we break it up well let's start with the sales revenue so we know what sales revenue is it's two hundred and twenty thousand so we we make a sale we credit sales revenue in the amount of 220 thousand so credit sales revenue for two hundred and twenty thousand dollars and then the eighteen 150 is what's left so eighteen 150 is what's left and in this case we are going to credit sales tax payable so credit sales tax payable for that amount because it's a liability to us we are just merely the middlemen in this situation and we're going to remit this amount to the state government or local government or whoever collects it at the end of the day so that's how we would treat a sales tax now notice that we've integrated the sales tax with the sales revenue we could do a separate entry but most often you're collecting the sales tax at the same time you are collecting the revenue so typically we book that all into one entry unless we don't collect any sales tax then we wouldn't have a sales tax live only Jews only put a sales tax line if the problem or question says to do so otherwise if there is no sales tax then just put debit cash credit sales revenue and you are good okay so that is a look at sales tax payable again very simple to really understand we're gonna collect additional money from our customers and then we're gonna remit that to the I'm sorry state or local government when we do that it's not revenue to us it is a liability and all we're merely doing is collecting it on behalf of the government agency and then ruminating it back to them when we do pay we're going to reduce the liability and credit the cash because we're going to write them a check for eighteen thousand 150 so that is a look at sales tax payable hope you enjoyed this lesson we'll see you in the next video hey guys if you liked this video make sure you press the like button below and if you're looking for worksheets that go along with all of these lessons head over to my website at Patrick Lee MSA com or clicking the link in the far right and I've got your next lesson right over here so just click that link and I'll take you to that video so until then we'll see you in the next lesson