11 - Accounting for sales tax Flashcards
what must registered businesses do
- charge tax on sales (output tax)
- suffer sales tax on purchases (input tax)
if sales exceed a certain amount, sales tax must be paid
what is the effect on prices of sales tax
goods and services are sold to customers at sales price + sales tax = more expensive
however, businesses can get recover sales tax on purchases from tax authorities
what must businesses do regularly with sales tax
- must complete a sales tax return showing output and input tax
- excess of output tax over input tax is paid to tax authorities
- but, excess of input tax over output tax means a refund is due from tax authorities
what are the different amounts within sales tax
net amount = sales price before sales tax applied
gross amount = net amount + sales tax
formula to calculate sales tax on net sales/purchases amount
sales tax = net amount X rate of sales tax as a %
(total sales tax should be rounded down to nearest cent. if you get a figure of more than 2dp, round down always)
formula to calculate sales tax from gross sales or purchases amount
sales tax = gross amount x (sales tax rate/sales tax rate plus 100)
where are relevant sales taxes recorded?
sales tax on:
- credit sales is recorded in the sales day book
- credit sales returns is recorded in the sales returns day book
- credit purchases is recorded in the purchases day book
- credit purchases returns is recorded in the purchases returns day book
- payments to the tax authorities and receipts from them are recorded in the cash book
what happens with the prime books of entry
periodically, the books of prime entry are totalled and the totals posted to the nominal ledger
the totals of the sales tax columns are posted to the sales tax control account
what is the sales tax control account
used to establish any balance due to tax authorities or reclaimable from them
what are the different aspects of a sales tax control account (STCA)
- balance b/d
- balance c/d
- sales
- cash sales
- purchases
- sales returns
- purchase returns
- bank
what is the balance b/d and explain where it is
- on right hand side of stca because it is a liability
- bc in any profitable business, sales revenue > total expenses
- if this is the case, business will owe sales tax to tax authorities at end of sales tax period
what is the balance c/d and explain where it is
- balancing figure which enables totals on both sides of the T account to equal each other
- usually a balancing figure on the left hand side of the T account
what is the sales section and explain where it is
- when a business makes a sale it must pay sales tax collected on behalf of the customer to tax authorities
- so, a sale = increase in sales tax liability
what is the cash sales section and explain where it is
- works in same way as credit sales, but amounts involved are smaller
- increase in sales tax liability when a cash sale is made
what is the purchases section and explain where it is
- business makes purchase, it can then reclaim sales tax paid on that purchase from tax authorities
- purchase = decrease in sales tax liability
what is the sales returns section and explain where it is
- opposite effect to sale, decreases sales tax liability
- reduced because if product returned, sales tax no longer needs to be paid to tax authorities
what is the purchase returns section and explain where it is
- opposite effect of a purchase, increases sales tax liability
- amount of sales tax reclaimable is reduced because the customer is returning the goods
- sales tax originally levied on item can’t be reclaimed from the tax authorities
what is the bank section and explain where it is
this is the payment made to tax authorities or money received from them
what is a trade discount
% reduction from list price of goods/services (standard price before discounts)
offered bc:
- customer is regular and valued
- incentive for new customer to buy
- customer is in the same trade as the supplier and supplier wants to develop good relations
what is a bulk discount
- % reduction from list price because order is substantial
- offered to encourage customers to place significant orders so costs of admin and delivery are reduced
- may be offered as well as or instead of a trade discount
- if bulk discount added in addition to trade discount, standard practice to calculate bulk discount on amount AFTER trade discount deducted
what are settlement discounts
- offered, but not always taken, as an incentive to customers to settle a debt early
- eg supplier giving 5% discount if invoice settled in 14 days
what are zero rated supplies
zero rated supplies = are charged sales tax at rate of 0%
eg basic food, books and newspapers
business only making zero rate goods can register for sales tax and reclaim input tax on expenditure
what are exempt supplies
supplies which are un-taxable, so tax isn’t charged
business only making exempt supplies may not register for sales tax so it cant be recovered from expenditure
eg, betting, gaming, finance and banking services
why else might businesses not pay sales tax
they are non registered because they are below the tax threshold
don’t add sales tax and can’t claim it
what is irrecoverable sales tax and why might it arise
= where sales tax on certain inputs isn’t recoverable
sales tax on business entertaining can’t be reclaimed from the tax authorities so tax is included in costs
for expenses, it is included in SPL and for purchase of non current assets it is in the sofp
