Question

Ex 10.04: Why does the sales tax portion of a sale get credited to Sales Tax...

Ex 10.04: Why does the sales tax portion of a sale get credited to Sales Tax Payable instead of "Sales" or "Sales Tax Expense"?

Ex 10.08: What information does the Schedule of Accounts Receivable provide a business? Is this report one of the three main statements?

Ex 11.06: What does it mean if Accounts Payable has a Debit Balance? What does it mean if it has a Credit Balance? What financial statements is Accounts Payable reported on?

Ex 11.08: What is a Schedule of Accounts Receivable? From a financial perspective how can the Schedule of Accounts Receivable help an organization?

Homework Answers

Answer #1

The sales tax is collected by the seller from the buyer and then paid to the sales tax authorities. Thus, the sales tax portion of a sale is neither an income nor an expense for the seller. Since it is to be paid to the sales tax authorities, it is a liability of the seller and hence it is credited to the Sales Tax Payable account which is a liability account and not to Sales which is a revenue account or Sales Tax Expense which is an expense account.

The Sales Tax Payable account is thus credited at the time of sale for the amount of sales tax portion and it is debited when the amount is paid to the government.

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