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: A business commenced with capital in cash of $1,000. Inventory costing $800 net of sales tax is purchased on credit. Half of this inventory is then sold for $1,000 plus sales tax, the customer paying in cash at once. Sales tax is 20%
Ans:- asset 2600=capital 1600+ liability 1000
I have confusion with asset and liability. 1)When we purchase inventory 800 on credit with 20% tax. Why we recorded 800 instead of 9602) when we sold it 400 of inventory was left why we not included tax in it while when we sold it we recorded it as 1000+200tax ??
And 960 is recorded in liability + 40 . Why 960 and not 200 ?
This question is really confusingWhen they sell goods, they will receive cash of 1,200. However the 200 sales tax is owed to the state and so only 1,000 is recorded as sales and the other 200 is a liability to the state.
When they buy goods on credit, they owe 960 to the supplier. However only 800 is recorded as purchases and the other 160 reduces the sales tax owed to the state.
So the net amount owing to the state is 200 – 160 = 40.
This (and the entries involved) is all explained in my free lectures on sales tax.
The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
So can I consider it that in accounting equation we recorded purchases and sale as. net of sales tax(exclusive of tax ) and receivables payables and cash we record inclusive of sale tax .
But can you please explain one more thing that in this case output is higher then input tax so it’s a sale tax liability what if the input tax paid was higher than output tax?? Difference would be an asset??Yes – purchases and sales are net of tax. Receivables, payables and cash are inclusive of tax.
If the tax on purchases is greater than the tax charged on sales then the difference is owed back from the state and is a receivable (until the cash is received from the state).
Again, this is all explained in my free lectures on sales tax.
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