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Questions and Answers
If a business sells goods for $500 + sales tax $75, what amount should the sales account record?
If a business sells goods for $500 + sales tax $75, what amount should the sales account record?
- $75
- $500 (correct)
- $425
- $575
A business makes a profit from the sales tax it charges.
A business makes a profit from the sales tax it charges.
False (B)
If input sales tax is recoverable, the cost of purchases should ______ the sales tax.
If input sales tax is recoverable, the cost of purchases should ______ the sales tax.
exclude
If gross amount is $120 and the tax rate is 20%, what is the sales tax amount?
If gross amount is $120 and the tax rate is 20%, what is the sales tax amount?
An outstanding payable for sales tax is classified as a non-current liability in the statement of financial position.
An outstanding payable for sales tax is classified as a non-current liability in the statement of financial position.
Trade receivables and trade payables include the ______ amount of sales tax.
Trade receivables and trade payables include the ______ amount of sales tax.
Explain the treatment of recoverable input sales tax in the statement of profit or loss.
Explain the treatment of recoverable input sales tax in the statement of profit or loss.
A business is invoiced for input sales tax of $7,000 and charges sales tax of $13,000 on its credit sales and sales tax of $1,500 on its cash sales. What is the amount payable in the sales tax payable account?
A business is invoiced for input sales tax of $7,000 and charges sales tax of $13,000 on its credit sales and sales tax of $1,500 on its cash sales. What is the amount payable in the sales tax payable account?
If sales tax paid to suppliers exceeds the sales tax collected from customers, the difference is a current liability, not a current asset.
If sales tax paid to suppliers exceeds the sales tax collected from customers, the difference is a current liability, not a current asset.
If input sales tax is not recoverable, the cost of purchases must ______ the sales tax.
If input sales tax is not recoverable, the cost of purchases must ______ the sales tax.
In the context of sales tax, the term 'net amount' refers to:
In the context of sales tax, the term 'net amount' refers to:
Sales tax collected from customers is an expense for the business.
Sales tax collected from customers is an expense for the business.
The statement of profit or loss should not include ______ sales tax.
The statement of profit or loss should not include ______ sales tax.
A business purchases goods on credit for $600 + sales tax $90, and the input sales tax is recoverable. The journal entry to record this purchase should include:
A business purchases goods on credit for $600 + sales tax $90, and the input sales tax is recoverable. The journal entry to record this purchase should include:
Credit sales tax payable shows recoverable input sales tax.
Credit sales tax payable shows recoverable input sales tax.
Balances are usually collected in a ______ balance which is used as a basis for preparing a statement of profit or loss.
Balances are usually collected in a ______ balance which is used as a basis for preparing a statement of profit or loss.
Describe the effect of irrecoverable input sales tax on the recorded cost of purchases.
Describe the effect of irrecoverable input sales tax on the recorded cost of purchases.
A business has sales of $25,000 and charges sales tax of 8%. If cost of goods sold is $15,000, what is the gross profit, considering sales tax?
A business has sales of $25,000 and charges sales tax of 8%. If cost of goods sold is $15,000, what is the gross profit, considering sales tax?
If the total debits do not equal the total credits within a trial balance, it automatically means that the financial statements are materially misstated.
If the total debits do not equal the total credits within a trial balance, it automatically means that the financial statements are materially misstated.
A business will be owed money by the tax authorities if the sales tax ______ to suppliers exceeds the sales tax collected from customers.
A business will be owed money by the tax authorities if the sales tax ______ to suppliers exceeds the sales tax collected from customers.
Outline the potential impact of failing to properly account for sales tax on financial statements.
Outline the potential impact of failing to properly account for sales tax on financial statements.
Ron sells goods for $1,000 plus 10% sales tax. Which account is debited?
Ron sells goods for $1,000 plus 10% sales tax. Which account is debited?
The total amount of sales tax collected is reported as revenue in the income statement.
The total amount of sales tax collected is reported as revenue in the income statement.
If a business sells goods on credit, the sales tax is recorded in the _____ account.
If a business sells goods on credit, the sales tax is recorded in the _____ account.
A business buys goods on credit for $300 plus 5% sales tax. If the sales tax is recoverable, which account is debited?
A business buys goods on credit for $300 plus 5% sales tax. If the sales tax is recoverable, which account is debited?
Total debit balances should equal total _____ balances in the trial balance.
Total debit balances should equal total _____ balances in the trial balance.
What is the primary purpose of accounting for sales tax?
What is the primary purpose of accounting for sales tax?
A company has $50,000 in sales and pays $4,000 in sales tax. If purchases are $20,000 with $1,500 sales tax, and $500 of the input sales tax is irrecoverable, what is the sales tax payable to authorities?
A company has $50,000 in sales and pays $4,000 in sales tax. If purchases are $20,000 with $1,500 sales tax, and $500 of the input sales tax is irrecoverable, what is the sales tax payable to authorities?
A current asset does not appear as an outstanding payable for sales tax in the statement of financial position.
A current asset does not appear as an outstanding payable for sales tax in the statement of financial position.
A trial balance is created to confirm the _____ of the accounting equation.
A trial balance is created to confirm the _____ of the accounting equation.
Explain how sales tax affects the price paid by consumers versus the revenue recognized by the seller.
Explain how sales tax affects the price paid by consumers versus the revenue recognized by the seller.
When assessing whether input sales tax is recoverable, what criteria MOST comprehensively determines its treatment within accounting records?
When assessing whether input sales tax is recoverable, what criteria MOST comprehensively determines its treatment within accounting records?
If a business erroneously excludes significant recoverable input sales tax from its purchases, understating its assets, its financial statements, though inaccurate, would still generally adhere to GAAP principles concerning conservatism.
If a business erroneously excludes significant recoverable input sales tax from its purchases, understating its assets, its financial statements, though inaccurate, would still generally adhere to GAAP principles concerning conservatism.
A firm records intercompany transactions but the ledger and trial balance does not account for reconciliation. What could be an error?
A firm records intercompany transactions but the ledger and trial balance does not account for reconciliation. What could be an error?
A company shows $4000 for cost of good sold, $890 for sales tax and $10,000 in revenue. If sales tax is 8.9% what is the most accurate deduction to take?
A company shows $4000 for cost of good sold, $890 for sales tax and $10,000 in revenue. If sales tax is 8.9% what is the most accurate deduction to take?
Why does sales tax not affect the statement of profit or loss?
Why does sales tax not affect the statement of profit or loss?
The statement of profit or loss includes output sales tax
The statement of profit or loss includes output sales tax
If a business purchases goods on credit (i.e $40) why is sales tax payable ($40) recorded if it does not impact profit or loss?
If a business purchases goods on credit (i.e $40) why is sales tax payable ($40) recorded if it does not impact profit or loss?
Even though input sales tax does not impact the statement of profit and loss, it still must be tracked.
Even though input sales tax does not impact the statement of profit and loss, it still must be tracked.
Why is sales tax payable debited for input tax?
Why is sales tax payable debited for input tax?
In what instance is sales tax included in the cost of purchases?
In what instance is sales tax included in the cost of purchases?
How is sales tax paid to authorities by businesses?
How is sales tax paid to authorities by businesses?
In what instances would a business be owed money by the authorities?
In what instances would a business be owed money by the authorities?
Flashcards
Net Amount Formula
Net Amount Formula
Gross Amount / (1 + tax rate).
Sales Tax Impact on Profit/Loss
Sales Tax Impact on Profit/Loss
Sales tax doesn't affect the statement of profit or loss, usually being collected on behalf of tax authorities.
Unpaid Sales Tax
Unpaid Sales Tax
An outstanding payable appears as a current liability.
Recoverable Input Sales Tax
Recoverable Input Sales Tax
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Irrecoverable input sales tax
Irrecoverable input sales tax
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Trade Receivables/Payables & Sales Tax
Trade Receivables/Payables & Sales Tax
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Sales Tax Payable
Sales Tax Payable
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Credit Sales - Sales tax
Credit Sales - Sales tax
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Credit Purchases - Sales Tax
Credit Purchases - Sales Tax
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Cash Sales - Sales tax
Cash Sales - Sales tax
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Trial Balance Purpose
Trial Balance Purpose
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What is a trial balance?
What is a trial balance?
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Study Notes
Sales Tax on Gross Amount
- Net amount = Gross amount / (1 + tax rate)
- Example: Gross amount = $80, tax rate = 15%
- Net amount = $80 / (1 + 0.15) = $69.57
- Sales tax = $80 - $69.57 = $10.43
- When calculating sales tax, verify the tax rate
Accounting for Sales Tax
- Sales tax does not affect the statement of profit or loss, except for irrecoverable sales tax scenarios.
- Sales tax is collected on behalf of tax authorities for periodic payments.
- Outstanding sales tax payable is a current liability on the financial position statement.
- Excess sales tax paid to suppliers over collected sales tax is a current asset.
Statement of Profit or Loss
- Businesses don't profit from sales tax.
- Profit or loss statements must not include sales tax.
- When recording a sale of goods for $600 + sales tax $90:
- Dr. Cash or trade receivables control account $690
- Cr. Sales $600
- Cr. Sales tax payable (output sales tax) $90
- Recoverable input sales tax should be excluded from purchase costs.
- When recording a purchase on credit for $400 + sales tax $60:
- Dr. Purchases $400
- Dr. Sales tax payable (input sales tax recoverable) $60
- Cr. Cash or trade payables control account $460
- Trade receivables and payables include the full sales tax amount.
- Non-recoverable input sales tax must be included in the cost of purchases.
Sales Tax Questions
- Trade receivables and trade payables include sales tax.
- Understanding sales tax logic is more effective than memorization.
Payable for Sales Tax
- Sales tax paid to authorities = Recoverable input sales tax on purchases - output sales tax on sales.
- Example: Input sales tax = $8,000, credit sales tax = $15,000, cash sales tax = $2,000
- Dr. Trade payables control account (input sales tax) $8,000
- Dr. Cash (payment to authorities) $9,000
- Cr. Trade receivables control account (output sales tax invoiced) $15,000
- Cr. Cash (output sales tax on cash sales) $2,000
- The outstanding payable for sales tax is a current liability on the financial position statement.
- Sales tax refund owed by authorities is a current asset.
Sales Tax Payable Example
- A business has $4000 sales tax on sales and $3500 sales tax on purchases, including $250 irrecoverable sales tax.
Sales Tax: The Main Points
- Credit Sales
- Exclude sales tax from the sales account and statement of profit or loss (SOPL)
- Credit sales tax payable account with output sales tax element of trade receivables invoiced
- Cash Sales
- Exclude sales tax from sales account and SOPL
- Credit sales tax payable account with output sales tax element of cash sales
- Credit Purchases
- Exclude recoverable sales tax from purchases account and SOPL
- Include irrecoverable sales tax in purchases account and SOPL
- Debit sales tax payable account with recoverable input sales tax element of credit purchases
- Cash Purchases
- Exclude recoverable sales tax from purchases account and SOPL
- Include irrecoverable sales tax in purchases account and SOPL
- Debit sales tax payable account with recoverable input sales tax element of cash purchases
The Trial Balance
- Each general ledger account's entries are totaled and a balance is recorded
- Balances are collected in a trial balance for preparing financial statements.
- Trial balance confirms accounting record accuracy.
- Lists ledger account balances, debit balances should equal credit balances.
- Trial balance lists ledger balances in debit (Dr.) and credit (Cr.) columns.
- First step: Collect ledger accounts before creating a list of account balances.
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