Syllabus D. Recording Transactions And Events D1. Sales and Purchases

D1d. Calculate sales tax 2 / 3

Syllabus D1d)

Calculate sales tax on transactions and record the consequent accounting entries.

Accounting Treatment

Registered businesses charge output sales tax on sales and suffer input sales tax on purchases.  

Sales tax does not affect the statement of profit or loss, but is simply being collected on behalf of the tax authorities to whom a quarterly payment is made.

Therefore, if a business sells goods for $1,000 + 17.5% sales tax, the accounting entries to record the sale would be: 

Dr Cash/trade receivables(Gross) $1,175
Cr Sales (Net) - P&L  $1,000
Cr Sales tax control account $175

If input sales tax is recoverable, the cost of purchases should exclude the sales tax and be recorded net of tax. 

Therefore, if a business purchases goods on credit for $500 + 17.5% sales tax, the accounting entries would be: 

Dr Purchases - P&L $500.00
Dr Sales tax control account $87.50
Cr Cash/trade payables $587.50

Irrecoverable Sales Tax

There are some circumstances in which traders are not allowed to reclaim sales tax paid on their inputs.  

For e.g. sales tax charged on motor cars, other than for resale, and on certain business entertaining expenses is irrecoverable. 

In these cases, sales tax must be regarded as part of the cost of the items purchased and included in the statement of profit or loss charge or in the statement of financial position as appropriate.

Therefore, the double entry for buying a motor vehicle, where sales tax is irrecoverable, is: -

Dr Motor Vehicles A/c (cost + sales tax)
Cr Cash A/c (cost + sales tax)