Sales Tax (part b) – ACCA Financial Accounting (FA) lectures
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Hello sir what will be the tax calculation if we buy a Van for a business use not for resale?
Dr Tax
It makes no difference to the sales tax entries (and I do state this in the lecture).
On the lecture video, it is stated that when dealing with input sales tax, we debit the Purchases account with the Net figure, Credit the Payables account with the Gross figure and then Debit the Sales Tax account with the Sales tax figure.
But when paying the electricity bill, on the video it is written as Credit cash for the Gross Figure, Debit Electricity for the Net figure and Debit Sales Tax for the Sales tax amount.
Could you help me understand why on the electricity example we are Debiting the Net figure rather than the Gross figure when the Gross figure would be due to the Electricity company, since they collect the Sales tax?
Many thanks
Hi, thank you, this was very useful! When is Sales Tax paid? If we bought something in December on credit, and paid in January, is the Sales Tax in the December or January figures?
Usually in a T account, whenever we dr or cr an item, we reference it to another account of the opposite side of the dr cr having an equal value – Dual effect. Eg Dr Cash 2000, Cr Capital 2000.
But what should we reference for Sales tax entry in the T-Accounts ? There is no equal opposite value, plus there are two accounts to reference.
Thanks for the education.
I do wonder though, why should the Government pay back the tax amount to us because we bough Machineries. We should be treated as consumers just like your jumper example, as machinery is an asset, and it should not be linked and compared to the tax we charged our customer on sales, which would naturally be lower than the tax charged to us on purchase of an Asset. It should rather only be linked to our purchase of goods for resale.
Unless the Government are helping the Business for planning expansions, with rebates….
Please comment.
It is the standard rule throughout the European Union. It is only the final consumer that ultimately suffers the tax.
Other countries such as the US have a sales tax, but again this is only charged when the goods are sold to the final consumer and it is only the final consumer that suffers it.
Machines are a cost of producing the goods, just as the materials are.
So what happens if Machines are a cost of producing the goods, just as the materials are ? Is there a chapter of your lecture series I have to refer to for understanding tax relation with non current assets ?
Because so far I just understood Sales tax of Sales is compared with Purchase of Inventory, for recovery of money.
This is new for me – regarding non current assets like machinery. Is this an advantage that is encouraged to all companies for expanding – by allowing them to recover even the tax on non current assets If it be $1,000,000, just by doing a lets say $1000 sales transaction.
The only knowledge of tax required for Paper FA are the rules I explain in the lectures on sales tax.
You will learn all the details rules for all taxes when you take Paper TX – the reasons for the rules is completely irrelevant for Paper FA.
However it is a fact that all Sales Tax suffered on all expenditure is set off against all Sales Tax charged, and if necessary the state refunds tax.
Hi John.
While resolving the exercise number 5 of this chapter (ONLINE FA MCQ TEST). There was a question that Alison is not registered for sales tax purpose and received an invoice with tax. So the correct answer was Dr. Purchases XX; Credit Payable XX. There was no entry for tax in correct answer. I am surprised the lesson i learned in your lecture that while making sales, the non sales tax register company, cannot collect sales tax. However, this is the case related to purchases where the company is sales tax registered or not but they are required to pay sales tax. can you help me clearing this confusion please. as always
All companies registered for sales tax have to charge the tax when they make sales.
If a non-registered business buys anything from a company registered for tax then they will have been charged tax.
You as an individual will not be registered for sales tax, but in most countries in the world if you buy anything then the amount you pay will include tax that the seller has had to add.
Okay John. does it mean that the correct answer given in question no. 5 is not actually correct? And the tax entry should also have been passed?
The answer is correct. Read my previous reply again carefully.
Hi. The journal entries come easily to me. I however get confused with T Accounts. Is that normal and will it affect me negatively from the exam point of view if I am not great with T Accounts?
No. You cannot be asked to produce t-accounts in the exam 馃檪
Hi John,thanks for the lecture.
But I had a doubt regarding the ledger account in Example 4. When we create a ledger for payables we record the total value of 507600 but against with account.Because this entry has two debit aspects of Purchases and Sales tax.So what account name should we write against this total value of 507,600 in the ledger account.
It doesn’t matter what you write against the amount in practice (and in the exam you cannot be asked to produce t-accounts 馃檪 )
Thanks for the reply
You are welcome 馃檪
Dear Sir I’ve a problem in this question & I hope to be get helped by your knowledge,
“A business has an opening balance on the Sales Tax account showing a debtor of $590 and a closing balance also showing a debtor of $460”.
My question is how to account for opening and closing balances in the Sales Tax account?
I’ll be thankful for the act!
The opening balance will be on the debit side of the account and the closing balance will be entered on the credit side (and carried down to the debit side as explained in my earlier lectures on closing off accounts).
Sir if the question is
5.2 The following information relates to Eva Co’s sales tax for the month of March 20X3:
$
Sales (including sales tax) 109,250
Purchases (net of sales tax) 64,000
Sales tax is charged at a flat rate of 15%. Eva Co’s sales tax account showed an opening credit balance of
$4,540 at the beginning of the month and a closing debit balance of $2,720 at the end of the month.
What was the total sales tax paid to regulatory authorities during the month of March 20X3?
So here if we prepare the sales tax T ac than we should put closing debit balance of sales tax on the debit side right? but in bpp it is written on the credit side can you please explain why?
We put in the credit side because balances are always carried forward to the opposite side. When it is carried forward it will appear on the debit side.
Do watch the earlier lectures on double entry bookkeeping where I explain how we close off accounts and carry forward the balances.
Thank you sir
You are welcome 馃檪