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What is Sales Tax?

Money raised by governments to pay for amenities
(roads, fire halls, garbage pickup, military
protection, etc)

Also referred to as Consumption Tax

In Canada, sales taxes are charged by the federal
government, and most provincial governments

July 1, 2010 – 13% HST (Ontario Harmonized Sales
Tax) (Canada GST/HST Info Sheet)

In US, most states & some cities (eg Chicago)
charge sales tax
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Different names – same principle
When taxes are collected by a business on behalf
of the government they are called different
names relating to different taxes
•
•
•
•
•
GST (Goods & Service Tax
PST (Provincial Sales Tax )
VAT (Value Added Tax):
HST (Harmonized Sales Tax):
Sales and Use Tax
They all work on the same principle - we will use
GST of 5% as the example to demonstrate the
concept
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The sales price is not the total price
Some governments include the tax within the
sales price while others bill them separately
E.g. Buy clothing for $100. The sales bill or
advertisement will read $100 for the clothes plus
5% GST for total of $105
If GST is included then the advertisement will
read $105 including both the cost of the clothes
and the GST combined
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The sales price is not the total price
In either event, the store will keep the $100
representing the sale of the clothes but the $5
GST collected does not belong to the store.
It needs to be paid to the government and is
recorded as a liability on the stores records.
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Sell clothing for cash $100 + 5% GST
There are 2 transactions
$100 (Cr)
$100 (Dr)
1. Record the sale
$5 (Dr)
$5 (Cr)
2. Record the GST. This is
a liability because it
needs to be paid to the
government
Summary: The store collected $105 in cash - $100 belongs to
the store and $5 belongs to the government
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Pay the GST to the government
- $5 (Cr)
When it’s time to pay the
government, cash will
decrease (Cr) and the tax
liability will decrease (Dr)
- $5 (Dr)
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Taxes are sometimes referred to as Value Added
Tax because each business in the customer
service chain keeps adding to the value of the tax
Manufacturer
buys raw
material from
a supplier –
supplier
charges GST
Manufacturer
sells finished
goods to
wholesaler –
charges GST
to wholesaler
Wholesaler
sells goods to
a retailer –
charges GST
to retailer
Retailer sells
to customer –
charges GST
to customer
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Simplified Example
Seller
Buyer
Price
GST Rec’d
by Seller
Seller’s GST
Payable to CRA
Fabric
supplier
Dress
manufacturer
$50
$2.50
$2.50 less GST
paid on threads,
etc
Dress
manufacturer
Wholesaler
$100
$5.00
(5.00 – 2.50)
$2.50
Wholesaler
Dress store
(retailer)
$200
$10.00
(10.00 – 5.00)
$5.00
Dress store
(retailer)
Consumer
$400
$20.00
(20.00 – 10.00)
$10.00
Individuals (Consumer) may be entitled to a GST/HST
credit of up to $250.00 (for 2009 tax year)
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 The GST system allows those further down the line
(manufacturer, wholesaler, retailer) to recover the
GST paid
 The administration of GST requires both a GST
Paid, and a GST Collected account
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Bookkeeping example of GST tax transactions
Assume the current GST rate is 5%
Gifts & More buys a product for resale for cash from
a wholesaler for $100
What is the journal entry?
General Journal
Account Title and Explanation Debit
$100
Inventory
$ 5
GST Paid
Cash
Credit
$105
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Gifts & More sells their inventory costing $100 to a customer for
$200 cash.
What is the entry required?
There are 2 transactions
1. Record the sale
$200
$210
$10
General Journal
Account Title and Explanation Debit
Cash
Revenue
GST Collected
Credit
$210
$200
$ 10
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What is the second part of the entry required?
2. Record the Cost of Goods Sold
$100
$100
General Journal
Account Title and Explanation Debit
Cost of Goods Sold
Inventory
Credit
$100
$100
Summary
+$200 (Cr)
+$210 (Dr)
+$100 (Dr)
-$100 (Cr)
+$10 (Cr)
General Journal
Account Title and Explanation
Cash
Revenue
GST Collected
Cost of Goods Sold
Inventory
Debit
$210
Credit
200
10
100
100
Summary: The store collected $210 in cash - $200 belongs to
the store and $10 belongs to the government
Notice how you recognized the COGS in the amount of $100
which is matched to the sale value of $200
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GST is charged on sales at all levels
Later on, (usually the following month for large
companies and quarterly for “small businesses”)
Gifts & More must send the tax collected to the
government
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It is now time to pay the government for GST - Gifts
& More pays the government the difference between
GST collected $10 and GST paid $5
What is the entry?
General Journal
Account Title and Explanation Debit Credit
$10
GST Collected
$5
GST Paid
$5
Cash
If it happens that more GST was paid than
collected, the federal government would
owe Gifts & More the difference
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Review :
Why is sales tax a liability & not an expense?
Sales tax is always recorded as a liability
because it is collected on behalf of the
government and is therefore owed to the
government
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Lets Try
another
Exercise
together!
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Tools Suppliers Inc. (TSI) buys products totaling $150,
on account, for sale (profit) at a later time.
Tools Suppliers Inc.
What is the journal entry?
$150
Account Title and
Explanation
Inventory
Debit
Credit
$150
$150
Accounts Payable
$150
Purchased product for resale
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Record the sales tax of $7.50 (5% of $150)
owing by TSI to their supplier (on Account):
Tools Suppliers Inc.
What is the journal entry?
$7.50
Account Title and
Explanation
Sales Tax
$7.50
Debit
Credit
$7.50
Accounts Payable
$7.50
Sales tax owing on purchase
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TSI sells the products to Sheet Manufacturers Ltd. (SML) for
$200 (their cost was $150), plus tax of $10. This amount is
owing by SML (accounts receivable).
Tools Suppliers Inc.
The journal entry is……..
$200
Account Title and
Explanation
Debit
Credit
$210
Accounts Receivable
$210
Revenue
$200
Sales Tax
$ 10
$10
Record sale of product
Notice how the transaction combines the sales of the product
and sales tax owing together as one compound entry unlike the
previous slide where it was done separately.
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Here is a summary of the activities on the records of TSI:
Sales Taxes
Dr
$7.50
Cr
$10.00
$ 2.50
• TSI paid $7.50 in sales tax when they purchased the
product
• They billed $10 in sales tax when they sold the product
• Therefore they collected $2.50 more in sales tax than they
paid which is now owing to the government
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The journal entry for the payment of sales tax in the amount
of $2.50 to the government would be:
Tools Suppliers Inc.
Account Title and
Explanation
$2.50
Sales Tax
?
?
Debit
Credit
$2.50
Cash
$2.50
$2.50
Paid sales tax to government
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And now the last company in the chain of supply- Sheet
Manufacturers Ltd. (SML)
SML buys the product from TSI
Sheet Manufacturers Ltd.
$210
Record the journal entry, which
should include sales tax.
Account Title and
Explanation
Debit
Inventory
$ 200
Sales Tax
$10
Credit
$200
$10
Accounts Payable
$ 210
Purchased product for resale
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And the Final step is the sale of the product by SML to the final customer
SML sells the product for $300, plus 5% sales tax.
What is the entry?
Account Title and Explanation
Cash
Debit
Credit
$315
Revenue
$300
$15
Sales Tax
Record sale of product, including tax
SML pays the government the sales tax collected (they paid
$10, collected $15, and must pay the difference to the
government.
What is the entry?
Account Title and Explanation
Sales Tax
Cash
Paid sales tax to government
Debit
Credit
$5
$5
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And now ….
Back to Paralegal Bookkeeping …
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