Businesses that collect state sales taxes from customers must keep track of taxes received in order to pay them—usually on a monthly or quarterly basis. Here, Jean Scheid offers up accounting journal entries for sales and use tax.
Sales and Use Tax
Sales and use taxes are usually determined from a state’s taxation and revenue department and can vary depending upon the town, county or municipality—meaning they are all different. The sales tax rate for individual areas are sent via e-mail, obtained from the state’s website or mailed in a packet that includes forms to use in order to report and pay sales and use taxes.
If your business has two or more locations, your tax rate may be different for each depending upon the rate for the geographical area.
A good way to keep track of sales taxes collected, since they are paid on a monthly or quarterly basis, is via accounting journal entries for sales and use tax. Below are some examples.
Journal Entries Showing Sales Tax
If you click on the screenshot to the left, our first example shows simple pizza sales, cost of sales, cash sales, and sales tax collected. As with all typical journal entries one makes, the debits and credits must equal—or balance.
In the example, you can see our sales are the debit; and cost of sales, tax collected and cash sales are the credits.
Journal Entries for Paying Sales Tax
The screenshot to the right shows (when time to pay) how that transaction would be recorded. Because the sales tax due is $1.50, you would credit cash in bank and debit the sales and use tax account to clear the outstanding credit—again making your accounting books balance.
If you ran a general ledger report for the sales and use tax account (215 in our example), if you posted your journal entries correctly, you would have easy access to what was owed to the revenue department for the month as a bulk total.
As stated earlier, often businesses may have more than one location with different sales and use tax rates. In the screenshot to the left, you’ll see our pizza shop has two locations with the amount of sales tax different for each location.
The sales, cost of sales and cash collected are recorded; and next, two different accounts must be created—one for each location with the sales tax rate connected to each account.
Paying Sales Tax for Multiple Locations
Finally, in the screenshot to the right, you’ll see how simple it is (if you posted correctly) to determine how much sales tax is owed for each location. Many states have pre-printed forms showing your sales and tax use number with multiple lines for purposes such as this when reporting sales tax collected.
If you utilize any accounting software, you can add accounts to your chart of accounts to pull to the general ledger. When adding sales and use tax accounts, most accounting software programs allow you to add multiple sales tax accounts to ensure when a sales is recorded the correct tax is collected and posted in the correct account for clarity when paying sales tax.
Using these sample accounting journal entries for sales and use tax will aid you in not only setting up accounts correctly, but also in determining what amounts to pay at month or quarter end.
The author has owned and operated retail stores for over 16 years with experience in collecting and paying sales tax.
All screenshots created by author.