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Lessons · Accounting · sales tax on a sale

Sales tax on a sale

Tax collected on a sale is not revenue. It belongs to the tax authority and is a liability until it is paid over: Dr Cash for the total, Cr Sales revenue for the price, Cr Sales tax payable for the tax.

Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.

In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.

What it is for

The owner reads the till total and says the shop made 10,800 this week. If 800 of that is tax collected for someone else, the shop made 10,000, and the 800 is due on a date the owner had better know.

How to think about it

Price times the rate is the tax; the rate is whatever applies where you are, and the problems here give it. Price plus tax is what the customer pays. To go backwards from a tax-inclusive total, divide by one plus the rate.

Worked example

Sale of 1,000 at the 8% rate given here: tax = 1,000 × 0.08 = 80
The tax, on the price.
Customer pays 1,000 + 80 = 1,080
What goes through the till.
Dr Cash 1,080 / Cr Sales revenue 1,000, Cr Sales tax payable 80
Three accounts. Revenue is the price; the tax is owed, not earned.
From a tax-inclusive total: price = 1,080 / 1.08 = 1,000
Going backwards: divide by one plus the rate.

Your turn

A till total of 1,155 includes tax at 5%. Write the line that gives the price.

Price = 1,155 /  = 1,100

The trap

Backing the tax out by multiplying the total by 0.92. On 1,080 that gives 993.60, not 1,000; the tax was 8% of the price, not 8% of the total.

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