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Is it true that the sales tax (output tax) is paid from net profits when we know them at the end of the year?
I am confused whether it is the net profits at the end of our SOPL or it is included in the tax expenses minus from profit before tax figures?
Please help!
Sales tax does not affect the profits.
The net of tax amount is credited to the sales account (which appears on the SOPL) but the tax is credited to a sales tax account and is then payable to the state (less any input tax suffered).
The tax is payable to the state either monthly of three-monthly depending on the rules in the particular country.
My free lectures on sales tax cover everything needed for Paper FA. (The lectures are a complete free course for Paper FA and cover everything necessary to be able to pass the exam well 🙂 )
1. Is it true that Tax account accounts for both the purchase tax in the debit-side and sales tax in the credit-side.
2. For example (lets take the lecture eg) the Tax account shows the debit side has a balance of $75600 which means it is a purchase tax that we paid on goods bought and therefore it is recoverable from the STATE?
3. Furthermore, the balance shown on the credit-side has a balance of $109200 which means it is a sales tax that we received from goods sold and therefore it is payable to the STATE?
4. Is it correct that the Tax accounts basically accounts for both the sales tax and purchase tax, is that correct?
5. Could you please explain that isn’t it true that sales tax and purchase tax are actually part of tax expenses shown in SOPL before getting net profit figures?
6. Is it also true that we show the NET balances of sales and purchases in our Financial statements after deducting the taxes are the amounts?
7. And where in the financial statements do we exactly show the purchase tax and sales tax that we charged or suffered?
Truly Thankful to YOU ? ? ?
1 to 4 are correct.
As far as your other 3 points are concerned, with sales tax the company is collecting tax on behalf of the state. They cannot keep it and so it is not part of their income. The charge customers with the tax but then pay it to the state. (The reverse is true with the tax suffered on purchases).
Therefore it does not appear anywhere in the SOPL (because it is not an income or expense of the company). All the appears in the SOFP is the amount owing to or from the state (if any) at the end of the accounting period (appearing as either a receivable or a payable).
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