Sales Taxes PayableExplained with Journal Entry Examples

Written By:
Lisa Borga

Sales tax payable is a liability that results when businesses sell certain goods or services to customers.

When a business sells these goods or services, it must collect a sales tax that the government imposes on these goods.

Basically, businesses are required to collect money for the government in addition to the money they collect for themselves for the goods and services they sell.

When the business sells these goods and services, they need to list the amount of the purchase separate from the amount of the sales tax on the invoice.

After the business collects this sales tax, it stores the money collected until it is paid to the appropriate tax authorities.

There is generally a period of time between when a business collects sales taxes and the time they need to remit the money to the tax authorities.

It is this difference in time that creates the need for a sales tax payable account.

This account will be listed as a liability in a business’s books.

Recording Sales Tax Payable

Recording sales tax is a pretty simple procedure.

Sales taxes are recorded as part of the transaction to record a sale for your business in the sales journal.

When your business is recording a sale, the sales tax account will be credited.

It is important to keep a total of the sales tax collected in the sales tax payable account your business keeps in its general ledger.

If a customer returns an item for which sales tax was collected, the sales tax payable account will be debited as part of the transaction to record the item being returned.

It is important to make sure that the total for the sales tax payable account is adjusted for the amount that the account is debited.

Journal Entries

There are two types of journal entries businesses typically make for sales tax payable.

One of these entries is for the sales tax a business collects when selling a taxable item or service.

The other journal entry is made when a business remits the sales tax it has collected to the tax authorities.

Here is the journal entry a business would make after collecting sales tax from a customer as part of the sale.

This journal entry increases the balance of the cash account and also increases the balances of both the sales account and the sales tax payable account.

Here is the journal entry a business would make when remitting the sales taxes they’ve collected to the tax authorities.

This journal entry decreases the balance of the cash account and the balance of the sales tax payable account.

Sales Tax Payable Examples

Here are two examples of recording sales tax payable.

One example shows how to record the collection of sales tax.

The other example shows how to record the remittance of sales tax payable to the tax authorities.

Example One

Suppose Company X  operates in a state in which it is required to collect sales tax, and the company made three sales in the first week of October.

Here are the company’s sales for the first week of October.

• October 2^nd, 2021: The company sold an item for $5,000 in cash. The company was required to collect a 5% sales tax on the item.
• October 4^th, 2021: The company sold an item on credit for $3,000. The company was required to collect a 4% sales tax on this item.
• October 6^th, 2021: The company sold an item for $10,000 in cash. The company was required to collect a sales tax of 10% on this item.

Here are the journal entries the company recorded for the sales it made during the first week of October.

Example Two

Here is the journal entry the company would make when it remits the taxes in the first week of December.

Is Sales Tax Payable Recorded on the Balance Sheet?

Sales tax payable is a current liability, meaning it is usually paid within one year of the time it is collected.

Therefore, it would be listed on the balance sheet either under short-term liabilities or current liabilities.