How to Properly Record Sales Tax Payable

Sales tax payable represents a current liability for businesses, reflecting money collected from customers on behalf of taxing authorities. This amount is not considered revenue; rather, it is a temporary holding that must eventually be remitted to the appropriate government entity. Accurately recording this liability is fundamental for maintaining precise financial statements and ensuring compliance with tax regulations. Businesses act as intermediaries, collecting these funds until their due date, ensuring their actual earnings are distinct from the tax obligations they manage.

Recording Sales Tax at the Point of Sale

When a business makes a sale subject to sales tax, the initial accounting entry captures this transaction. The total amount received from the customer, including sales price and sales tax, is recorded as an increase to either the Cash account (for immediate payments) or the Accounts Receivable account (for sales on credit).

Simultaneously, the selling price (excluding sales tax) is credited to the Sales Revenue account, and the collected sales tax is credited to the Sales Tax Payable account. For instance, if a $100 sale has an 8% sales tax, the customer pays $108. The business debits Cash for $108, credits Sales Revenue for $100, and credits Sales Tax Payable for $8. This immediate recognition clarifies that the sales tax portion of the payment does not belong to the business but is owed to the government.

Calculating and Reconciling Sales Tax Payable

Businesses must periodically calculate the total sales tax collected and prepare for remittance to the relevant taxing authorities. This involves accumulating all sales tax collected over a specific reporting period, such as a month or a quarter. The sales tax payable account is continuously updated as sales occur, increasing with each collection.

Reconciling the sales tax payable balance with sales records ensures accuracy before remitting funds. This process involves comparing recorded sales tax liabilities against actual sales figures to identify discrepancies. Businesses gather sales records, summarize total sales and tax collected, and verify that all sales were correctly classified as taxable or exempt. This reconciliation helps confirm the recorded liability matches the amount that should be paid, minimizing errors and ensuring compliance.

Recording Sales Tax Remittance

The final step in managing sales tax involves remitting the collected funds to the appropriate government authority. This action requires a specific journal entry to reflect the payment and reduce the recorded liability.

When the sales tax is paid, the Sales Tax Payable account is debited. Concurrently, the Cash account is credited by the same amount. For example, if a business remits $1,000 in collected sales tax, it would debit Sales Tax Payable for $1,000 and credit Cash for $1,000. This entry reduces the sales tax payable balance to zero for the period covered by the remittance.