CIMA BA3 Syllabus B. RECORDING ACCOUNTING TRANSACTIONS - Calculate sales tax - Notes ^{2 / 18}

Accounting Treatment

A business can only become registered for sales tax if it makes standard rated and/or zero rated sales. 

ONLY If a business is registered for sales tax, then it will have a sales tax control account and will charge output tax on its standard rated sales and can claim input tax on its standard rated purchases. 

Output tax - Input tax = x / (x)

If this balance is positive, then the difference must be paid to the tax authorities, if it is negative, then the difference can be recovered from the tax authorities.

Therefore, 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

Calculate sales tax using gross and net values

Using gross value
Gross value x Sales tax % / (100 + Sales tax %) = Sales tax amount 

Using net value
Net value x Sales tax % = Sales tax amount

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) 

Non Registered Businesses

For businesses that are not registered for sales tax, the accounting treatments for sales and purchases will be:

Sale

Dr Cash / Receivables (Gross amount)
Cr Sales (Gross amount)

Purchase

CR Cash / Payables (Gross amount)
Dr Purchases (Gross amount)