Sales Tax Journal Entries with practical examples and key insights, tailored to business owners and accountants:
The Ultimate Guide to Recording Sales Tax in Your Accounting Books
For any business owner, understanding how to properly record sales tax in the accounting books is essential to maintaining accurate financial records. Whether you’re collecting sales tax from customers or making payments on purchases, properly recording these transactions ensures that your books accurately reflect your tax liabilities and expenses. This guide will walk you through creating sales tax journal entries for both collected sales tax and sales tax paid on purchases, using QuickBooks or any other accounting software.
1. Accounting for Sales Tax Collected from Customers
When your business collects sales tax from customers, this tax is not part of your revenue or income. Rather, it represents an obligation you owe to the government. You are essentially holding this money temporarily until it is time to send it.
Journal Entry to Record Sales Tax Collected
Whenever you make a sale and collect sales tax, you must record two things:
- The revenue from the sale
- The sales tax collected (your liability to the government)
For organized records, create a Sales Tax Payable account to track the sales tax liability. Here’s the basic journal entry:
The total amount collected from the customer is $5,250.
Your journal entry would be:
| Date | Account | Notes | Debit ($) | Credit ($) |
|---|---|---|---|---|
| X/XX/XXXX | Bank A/c Debit | Collected sales tax | 5,250 | |
| To Sales Revenue A/c | 5,000 | |||
| To Sales Tax Payable A/c | 250 |
This entry increases your Bank account and records the revenue and sales tax liability.
Journal Entry to Remit Sales Tax to the Government
When you remit the collected sales tax to the government, you need to reduce your Sales Tax Payable liability account and reduce your Bank account by the same amount.
Here’s the journal entry for remitting the $250 of sales tax collected:
| Date | Account | Notes | Debit ($) | Credit ($) |
|---|---|---|---|---|
| X/XX/XXXX | Sales Tax Payable A/c Debit | Remitted sales tax | 250 | |
| To Bank A/c | 250 |
This entry reduces both your liability (Sales Tax Payable) and your Bank balance, ensuring your books are balanced after you remit the sales tax.
2. Accounting for Sales Tax Paid on Purchases
When your business purchases goods or services, you may be required to pay sales tax on those purchases. Unlike sales tax collected, which is a liability, sales tax paid on purchases is considered an expense. In this case, the total price of your purchase includes both the cost of item and sales tax.
Journal Entry for Sales Tax on Purchases
Your total payment is $1,040.
Here’s the journal entry:
| Date | Account | Notes | Debit ($) | Credit ($) |
|---|---|---|---|---|
| X/XX/XXXX | Supplies Expense A/c Debit | Purchased goods | 1,040 | |
| To Bank A/c | 1,040 |
In this case, you increase your Supplies Expense and reduce your Bank account for the total payment.
Best Practices for Managing Sales Tax in Your Accounting
Here are some helpful tips to manage sales tax efficiently in your accounting system:
- Separate Sales Tax from Revenue
Remember, sales tax is not part of your income. Always separate sales tax collected from customers in your books to avoid inflating your revenue figures. - Create a Sales Tax Payable Account
Set up a dedicated Sales Tax Payable account to track the amount you owe to the government. This helps keep your liabilities organized and ensures accurate reporting. - Automate with Accounting Software
Most accounting software, like QuickBooks, allows you to automate the sales tax tracking process. You can set sales tax rates, and the system will automatically track and separate sales tax for each transaction. - Review Sales Tax Reports Regularly
Generate periodic (monthly or quarterly) sales tax reports to review sales tax collected and remitted. This will help ensure your business complies with tax laws and avoids penalties for late payments. - Stay Updated with Local Sales Tax Laws
Sales tax rates and regulations vary by location. Make sure you stay informed about your state’s tax policies, including rate changes or filing requirements.
Sales Tax Journal Entries: Conclusion
By accurately recording both sales tax paid on purchases and sales tax paid on purchases, you can keep your accounting books in tip-top shape. Whether you’re using QuickBooks, Xero, or another accounting software, following these steps will ensure that your sales tax obligations and expenses are properly managed.
With these journal entries, you’re not just organizing your business finances—you’re preparing for accurate tax filings, reducing the risk of errors, and ensuring compliance with local sales tax regulations.
If you are unsure about how to classify or record certain sales tax entries, it is always a good idea to consult with a professional accountant. They can offer personalized advice and help keep your books accurate.