SALES TAX

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

Input and Output Sales Tax:

Registered businesses charge output sales tax on sales and suffer input sales tax on purchases. 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.

Sales tax charged (or 'collected') on goods and services sold by a business is referred to as output sales tax.
Sales tax paid (or 'suffered') on goods and services bought by a business is referred to as input sales tax.

The supplier, manufacturer, wholesaler and retailer are all sales tax registered traders. In order to charge sales
tax, a business must be registered for sales tax.

Irrecoverable sales tax:

Some sales tax is irrecoverable. Where sales tax is irrecoverable it must be regarded as part of the cost
of the items purchased and included in the statement of profit or loss charge or in the statement of financial
position as appropriate.
Example:
If a business pays $500 for entertaining expenses and suffers irrecoverable input sales tax of $75 on this
amount, the total of $575 paid should be charged to the statement of profit or loss as an expense. Similarly, if a
business pays $5,000 for a motor vehicle and suffers irrecoverable input sales tax of $400, the business
should capitalize the full amount of $5,400 as a non-current asset in the statement of financial position.

Amounts inclusive and exclusive of tax:

In business, you are likely to come across sales and purchases figures quoted as gross or net of sales tax.
The gross amount of a sale or purchase is the amount inclusive of sales tax.
The net amount of a sale or purchase is the amount exclusive of sales tax.
For example, if the net amount of a purchase is $100, and the rate of sales tax is 15%, the amounts are as
follows.
Net amount exclusive of sales tax: = $100
Sales tax: = $100 x 15% = $15
Gross amount inclusive of sales tax: = $100 + $15 = $115

Accounting for Sales Tax:

Sales tax charged on sales is collected by the business on behalf of the tax authorities. It does not form part of
the revenue of the business. For example, if a business sells goods for $600 + sales tax $90, i.e. 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 control account (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 control account (input sales tax recoverable) $60
CREDIT Trade payables $460

If the input sales tax is not recoverable (irrecoverable), the cost of purchases must include the tax, ie
purchases would be $460 in the example above, because it is the business itself which must bear the cost of
the tax.

Payable for Sales Tax:

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