11 - Accounting for sales tax

Question 1

what must registered businesses do

Answer 1

• charge tax on sales (output tax)
• suffer sales tax on purchases (input tax)

if sales exceed a certain amount, sales tax must be paid

Question 2

what is the effect on prices of sales tax

Answer 2

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

Question 3

what must businesses do regularly with sales tax

Answer 3

• 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

Question 4

what are the different amounts within sales tax

Answer 4

net amount = sales price before sales tax applied
gross amount = net amount + sales tax

Question 5

formula to calculate sales tax on net sales/purchases amount

Answer 5

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)

Question 6

formula to calculate sales tax from gross sales or purchases amount

Answer 6

sales tax = gross amount x (sales tax rate/sales tax rate plus 100)

Question 7

where are relevant sales taxes recorded?

Answer 7

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

Question 8

what happens with the prime books of entry

Answer 8

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

Question 9

what is the sales tax control account

Answer 9

used to establish any balance due to tax authorities or reclaimable from them

Question 10

what are the different aspects of a sales tax control account (STCA)

Answer 10

• balance b/d
• balance c/d
• sales
• cash sales
• purchases
• sales returns
• purchase returns
• bank

Question 11

what is the balance b/d and explain where it is

Answer 11

• 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

Question 12

what is the balance c/d and explain where it is

Answer 12

• 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

Question 13

what is the sales section and explain where it is

Answer 13

• 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

Question 14

what is the cash sales section and explain where it is

Answer 14

• works in same way as credit sales, but amounts involved are smaller
• increase in sales tax liability when a cash sale is made

Question 15

what is the purchases section and explain where it is

Answer 15

• business makes purchase, it can then reclaim sales tax paid on that purchase from tax authorities
• purchase = decrease in sales tax liability

Question 16

what is the sales returns section and explain where it is

Answer 16

• opposite effect to sale, decreases sales tax liability
• reduced because if product returned, sales tax no longer needs to be paid to tax authorities

Question 17

what is the purchase returns section and explain where it is

Answer 17

• 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

Question 18

what is the bank section and explain where it is

Answer 18

this is the payment made to tax authorities or money received from them

Question 19

what is a trade discount

Answer 19

% 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

Question 20

what is a bulk discount

Answer 20

• % 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

Question 21

what are settlement discounts

Answer 21

• 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

Question 22

what are zero rated supplies

Answer 22

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

Question 23

what are exempt supplies

Answer 23

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

Question 24

why else might businesses not pay sales tax

Answer 24

they are non registered because they are below the tax threshold

don’t add sales tax and can’t claim it

Question 25

what is irrecoverable sales tax and why might it arise

Answer 25

= 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