Sales Tax

A debit balance means that there is tax owing to the company (from the state). A credit balance means that there is tax owing to the state by the company.

There is a question I did and they gave the opening balance figure which is a credit, and then they say the closing balance figure is a Debit but when I reviewed the answer that debit closing balance was actually on the credit side of the T account. Is that a possible misprint? That has me confused.

If the 'missing figure' in a t-account is on the credit side, then when we carry it down we put it on the opposite side - i.e. on the debit side. If you are not sure about this then a good idea would be to watch my free lecture here on double entry bookkeeping.

This is the question: The following info 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 pd to regulatory authorities during the month of March, 20X3? A. $6,470.00 B. $11,910.00 C. $14,047.50 D. $13,162.17 Question: How will this look in a “T” account? I did listen to the lecture on bookkeeping but I’m still unsure as to why they credited the ending balance of $2,720. Thanking u a lot for ur assistance .

Usually, at the end of the period we calculate the balance as the missing figure and carry it down on the opposite side. So.....for example. If in an account we have debited with 10,000 and credited with 8,000, then to make it balance we put in 2,000 on the credit side - this is the balance and we carry it down on the opposite side. So we end up with a debit balance of 2,000 (which is perfectly sensible because the net of the original two entries was a debit of 2,000). In the question you have typed out, the have told you the final balance is a debit of $2,720 (just like in my little example I ended up with a debit balance of 2,000). But how did the $2,720 arrive there? (how did my debit balance of $2,000 arrive there?). It had been carried down from the credit side of the account.

So in other words we're using the c/d side because that is the original side? Think I understand a bit... I'm familiar with this in the topic Accruals and Prepayments.

I don't know what you mean by 'the original side'. You calculate the balance by filling in the missing figure, and then you carry it forward to the opposite side.

Okay understood, thanks!

Great :-)

Erin is registered for sales tax. During may she sells goods with a tax eclusive price 600 on credit. she offers a discount 3 % if Kyle pays within 10 days. kyle doesnt pay within 10 days. sales tax 17.5 what amount should erin charge/? must we apply 3 %, as it is said kyle doest pay within 10 days??

The sales tax is calculated after the discount (whether or not the discount is actually taken). So here, the sales tax will be 17.5% x (600 - 3%) = 101.85

That's because it's a trade discount right?

No - it is a settlement discount. The VAT is calculated after taking all discounts (trade discounts and settlement discounts). It makes no difference whether or not they actually do pay on time and therefore get the settlement discount.

Yes it is a settlement discount. Thanks.

:-)

I do not know why you are confused. The final answer to the question is indeed 11910 as the tax paid during the period. (Okema24 was not asking what the answer was, he/she was asking about the closing balance, which is what I answered)

You are welcome :-)

Hi Sir, About this problem after I read your explanation I understand that at the beginning of 20x4 the sale tax balance b/f is 2720 debit balance which is what the question told us ( the closing Debit balance 2720) but when we solve this problem in 20x3 the balance c/d is credit side which need to transfer to opposite side (Dr) . Is it correct?

I am sorry, but you really are going to have to tell me which problem you are asking about!

The question of Okema24 On May 7, 2014 This is the question: The following info 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 pd to regulatory authorities during the month of March, 20X3? A. $6,470.00 B. $11,910.00 C. $14,047.50 D. $13,162.17 Question: How will this look in a “T” account? I did listen to the lecture on bookkeeping but I’m still unsure as to why they credited the ending balance of $2,720.

To end up with a debit balance means that the total of the debits must be more than the total of the credits. The balance is the missing figure to make the debit side total the same as the credit side, and so it will be on the credit side. Suppose there was a debit of 100 and a credit of 10. The missing figure is 90 on the credit side. We then put this on the opposite side and end up with a debit balance of 90. We have simply replaced the original figures with the net debit of 90.

Thanks a lot I got it !

You are welcome :-)

Hi, Sir Considering this problem.. I couldn't understand the question itself. Like, if we have an opening credit balance on Sales tax account it means that we owe some amount to the government, and when we have a closing debit balance on sales tax account it means that government owes us money, right? But here in this problem we have a closing debit balance which means that government owes us money? Doesn't it means that we shouldn't pay anything to the tax authorities? On May 7, 2014 This is the question: The following info 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 pd to regulatory authorities during the month of March, 20X3? A. $6,470.00 B. $11,910.00 C. $14,047.50 D. $13,162.17

The closing balance does mean that at the end of the month the government owes us money. That must mean that during the month we paid more than we should have - therefore they owed money back to us. At the start we owed 4540. During the month we owe an extra 15/115 x 109250 = 14250 tax on the sales. During the month the amount owing is reduced by 15% x 64000 = 9600 tax on the purchases. So if we had paid nothing during the month, then we would be owing 4540 + 14250 - 9600 = 9190. Because at the end of the month we are owed back 2720, it means we must have paid not only the 9190 but an extra 2720 as well, so we must have paid a total of 11910.

Aw, thank you! I got it now :)

Great :-)

At the start of the month they owed $5,250 to the state. During the month they charged tax on their sales of 10% x $62,150 = $6,215 and this is owed to the state. During the month they also suffered tax on their purchases of 10/110 x $71,940 = $6,540 and this reduces the amount owed to the state. Therefore at the end of the month they are owing to the state 5,250 + 6,215 - 6,540 = $4,925. It is owing to the state and is therefore a credit balance.