Sales Tax Flashcards
Input tax
- sales tax paid/suffered on goods/services bought by business
Output Tax
- sales tax charged/collected on goods/services sold by business
Sales Tax
- business’ sales/purchases often subject to
- indirect tax
- not paid direct to tax authorities
What must a sales tax registered trader carry out:
- charge sales tax on goods/services sold at rate prescribed by government (output)
- pay sales tax on goods/services purchased from other businesses (input)
- pay to tax authorities difference between output less input tax at prescribed intervals
- sometimes will be owed by authorities if output less than input in period
How is tax shown in a sales tax registered business statements?
SPL- income/expenditure shown net of sales tax
- belongs to tax authorities not business
SFP- trade receivables/payables shown gross as represent cash that will change hands
When can sales tax not be reclaimed/it is irrecoverable?
- trader not registered for sales tax
- not related to taxable business activities
- motor vehicle purchases/entertaining
How should irrecoverable tax be accounted for?
- trader must bear the cost of sales tax
- purchase will be recorded at gross price
- business capitalises full amount of purchase
Gross Amount
amount inclusive of sales tax
Net amount
amount exclusive of sales tax
Sales Tax Control Account
- normally a liability as owe the tax authorities
- SoFP
- output/recoverable input sales tax recorded here when purchases/sales made (not when cash changes hand)
- keeps a record of what is owed to tax authorities
How is the amount owed to/by tax authorities shown in financial statements?
SoFP
- owed to current liability
- owed by current asset
What is the double entry when the sales tax liability is paid to the tax authorities?
Dr Sales tax a/c
Cr Bank
Typically how often is the sales tax liability paid over?
every quarter
What is the double entry for credit sales with recoverable sales tax?
Dr Receivables (gross)
Cr Sales (net)
Cr Sales tax a/c (VAT at prescribed rate)
Why is the sales tax element excluded from statement of profit/loss on sales?
- money does not belong to business so is not part of their sales figure
- they are only collecting on behalf of tax authorities
