Sales Tax Journal Entry

Overview

Sometimes, the customers will be charged the sales tax for the products they purchase. Likewise, the company needs to account for sales tax with proper journal entry when it withholds the tax amount from the customers.

As the company withholds taxes from the consumers, it does not record the sales tax as an expense but as a tax liability instead. Later, it can remit this sales tax to the government or the taxing agent and settle this liability.

Sales tax journal entry

The company can make the sales tax journal entry by debiting the cash account and crediting the sales revenue account and sales tax account.

Account	Debit	Credit
Cash	$$$
Sales revenue		$$$
Sales tax payable		$$$

Sales tax payable is the tax obligation that the company owes to the government. Likewise, failing to remit this sales tax to the government or the taxing agent will lead to a severe penalty or fine from the government.

Later, when the company remits the withheld sales tax to the government or taxing agent, it can make the journal entry to eliminate the sales tax liability as below:

Account	Debit	Credit
Sales tax payable	$$$
Cash		$$$

After this accounting entry, the balance in the sales tax payable account should become zero for the current period until the next sale transactions.

Sales tax example

For example, the company ABC makes a cash sale of its product at the price of $8,000 (excluding sales tax). The sold product has a 6% sales tax attached which amounts to $48 (8,000 x 6%).

In this case, the company ABC can make a sales tax journal entry together with sales revenue as below:

Account	Debit	Credit
Cash	8,048
Sales revenue		8,000
Sales tax payable		48

Later, when the company remits this $48 of the tax to the government, it can make the journal entry as below:

Account	Debit	Credit
Sales tax payable	48
Cash		48