Lessons · Accounting · sales tax on a sale
Sales tax on a sale
Tax collected on a sale is not revenue. It belongs to the tax authority and is a liability until it is paid over: Dr Cash for the total, Cr Sales revenue for the price, Cr Sales tax payable for the tax.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
What it is for
The owner reads the till total and says the shop made 10,800 this week. If 800 of that is tax collected for someone else, the shop made 10,000, and the 800 is due on a date the owner had better know.
How to think about it
Price times the rate is the tax; the rate is whatever applies where you are, and the problems here give it. Price plus tax is what the customer pays. To go backwards from a tax-inclusive total, divide by one plus the rate.
Worked example
Sale of 1,000 at the 8% rate given here: tax = 1,000 × 0.08 = 80The tax, on the price.
Customer pays 1,000 + 80 = 1,080What goes through the till.
Dr Cash 1,080 / Cr Sales revenue 1,000, Cr Sales tax payable 80Three accounts. Revenue is the price; the tax is owed, not earned.
From a tax-inclusive total: price = 1,080 / 1.08 = 1,000Going backwards: divide by one plus the rate.
Your turn
A till total of 1,155 includes tax at 5%. Write the line that gives the price.
Price = 1,155 / = 1,100
Solve one, graded on the server
The trap
Backing the tax out by multiplying the total by 0.92. On 1,080 that gives 993.60, not 1,000; the tax was 8% of the price, not 8% of the total.