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Questions and Answers
What type of tax is sales tax?
What type of tax is sales tax?
- A tax levied on investments
- A tax levied on property
- A direct tax levied on income
- An indirect tax levied on the sale of goods and services (correct)
Sales tax is typically administered by the government directly
Sales tax is typically administered by the government directly
False (B)
What does a registered business do with the output sales tax collected and input sales tax paid?
What does a registered business do with the output sales tax collected and input sales tax paid?
- Pays both taxes to the authorities
- Charges output sales tax on sales and pays input sales tax on purchases (correct)
- Keeps both taxes as profit
- Avoids charging or paying any sales tax
What happens if, in a given period, a business's output sales tax is less than its input sales tax?
What happens if, in a given period, a business's output sales tax is less than its input sales tax?
Sales tax is a ______ tax, collected at various stages of a product's life.
Sales tax is a ______ tax, collected at various stages of a product's life.
What are GST and VAT?
What are GST and VAT?
In the context of sales tax, what does 'input sales tax' refer to?
In the context of sales tax, what does 'input sales tax' refer to?
The ultimate consumer bears the total cost of sales tax.
The ultimate consumer bears the total cost of sales tax.
If a supplier pays sales tax of $6 on initial supplies, who ultimately collects this amount?
If a supplier pays sales tax of $6 on initial supplies, who ultimately collects this amount?
Match the following terms with their definitions:
Match the following terms with their definitions:
Which of the following is a task that a sales tax registered trader must carry out?
Which of the following is a task that a sales tax registered trader must carry out?
A sales tax registered trader pays sales tax on goods and services purchased from other businesses. What is this known as?
A sales tax registered trader pays sales tax on goods and services purchased from other businesses. What is this known as?
What does a sales tax registered trader do with the difference between the sales tax collected on sales and the sales tax paid to suppliers for purchases?
What does a sales tax registered trader do with the difference between the sales tax collected on sales and the sales tax paid to suppliers for purchases?
If sales tax paid to suppliers exceeds sales tax collected on sales, the difference is repaid to the trader by the tax authority.
If sales tax paid to suppliers exceeds sales tax collected on sales, the difference is repaid to the trader by the tax authority.
In which of the following situations are traders not allowed to reclaim sales tax paid on their inputs?
In which of the following situations are traders not allowed to reclaim sales tax paid on their inputs?
What happens when traders are not allowed to reclaim sales tax paid on their inputs?
What happens when traders are not allowed to reclaim sales tax paid on their inputs?
What is the term for the amount of a sale or purchase that includes sales tax?
What is the term for the amount of a sale or purchase that includes sales tax?
If the net amount of a purchase is $100 and the sales tax rate is 15%, what is the sales tax amount?
If the net amount of a purchase is $100 and the sales tax rate is 15%, what is the sales tax amount?
Compute the net amount if the gross amount of a purchase is $80, and the sales tax rate is 15%.
Compute the net amount if the gross amount of a purchase is $80, and the sales tax rate is 15%.
Except where there is irrecoverable sales tax, sales tax does not affect the statement of ______ or loss.
Except where there is irrecoverable sales tax, sales tax does not affect the statement of ______ or loss.
Where does an outstanding payable for sales tax appear in the financial statements?
Where does an outstanding payable for sales tax appear in the financial statements?
If there is an excess of sales tax paid to suppliers over sales tax collected from customers, a receivable for this amount will appear as a current liability in the statement of financial position.
If there is an excess of sales tax paid to suppliers over sales tax collected from customers, a receivable for this amount will appear as a current liability in the statement of financial position.
A business sells goods for $600 + sales tax $90 (total price $690). How much should be recorded in the sales account?
A business sells goods for $600 + sales tax $90 (total price $690). How much should be recorded in the sales account?
A business purchases goods on credit for $400 + sales tax $60. If input sales tax is recoverable, how should the purchase be recorded?
A business purchases goods on credit for $400 + sales tax $60. If input sales tax is recoverable, how should the purchase be recorded?
A business purchases goods and input sales tax is not recoverable. How should the purchase be recorded?
A business purchases goods and input sales tax is not recoverable. How should the purchase be recorded?
In the statement of profit or loss, recoverable input sales tax is ______.
In the statement of profit or loss, recoverable input sales tax is ______.
In the statement of profit or loss, how should you treat output sales tax?
In the statement of profit or loss, how should you treat output sales tax?
Sales tax always affects the profit or loss of a business.
Sales tax always affects the profit or loss of a business.
What is the fundamental difference in the accounting treatment between recoverable and irrecoverable sales tax?
What is the fundamental difference in the accounting treatment between recoverable and irrecoverable sales tax?
Describe the flow of sales tax from the initial supplier to the tax authorities, including the role of registered businesses.
Describe the flow of sales tax from the initial supplier to the tax authorities, including the role of registered businesses.
A retailer purchases televisions from a wholesaler for $320 (excluding sales tax) and sells them to consumers for $480 (excluding sales tax). The sales tax rate is 15%. Assuming all transactions are on credit, what is the retailer's net sales tax payable to the tax authorities?
A retailer purchases televisions from a wholesaler for $320 (excluding sales tax) and sells them to consumers for $480 (excluding sales tax). The sales tax rate is 15%. Assuming all transactions are on credit, what is the retailer's net sales tax payable to the tax authorities?
In the context of sales tax, the term 'irrecoverable' typically applies to businesses that are exempt from collecting sales tax.
In the context of sales tax, the term 'irrecoverable' typically applies to businesses that are exempt from collecting sales tax.
Match the accounting treatment with the sales tax type in the statement of profit or loss:
Match the accounting treatment with the sales tax type in the statement of profit or loss:
Explain why sales tax is considered a cumulative tax.
Explain why sales tax is considered a cumulative tax.
The formula to compute the net amount with a gross amount of $x and tax rate t is ______.
The formula to compute the net amount with a gross amount of $x and tax rate t is ______.
Illustrate with an example how irrecoverable sales tax can impact the pricing strategy of a business.
Illustrate with an example how irrecoverable sales tax can impact the pricing strategy of a business.
What is a sales tax?
What is a sales tax?
How is tax charged before it gets to the consumer?
How is tax charged before it gets to the consumer?
What is input sales tax?
What is input sales tax?
what is output tax
what is output tax
What is the gross amount?
What is the gross amount?
What is the net amount?
What is the net amount?
Why is the sales tax an indirect tax?
Why is the sales tax an indirect tax?
Flashcards
Sales Tax
Sales Tax
An indirect tax levied on the sale of goods and services, usually administered by businesses.
Output Sales Tax
Output Sales Tax
Sales tax charged by a business on goods and services it sells.
Input Sales Tax
Input Sales Tax
Sales tax paid by a business on goods and services it 'bought in'.
Irrecoverable Sales Tax
Irrecoverable Sales Tax
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Gross Amount
Gross Amount
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Net Amount
Net Amount
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Sales Tax in Profit/Loss
Sales Tax in Profit/Loss
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Sales Tax Payable
Sales Tax Payable
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Sales Tax Receivable
Sales Tax Receivable
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Study Notes
The Nature of Sales Tax and How it is Collected
- Sales tax serves as an indirect tax imposed on the sale of goods and services
- It's generally managed by businesses for local tax authorities
- Registered entities collect output sales tax on sales and remit input sales tax on their purchases
- If output sales tax surpasses input sales tax, the business remits the balance to tax authorities
- Tax authorities will refund the difference to a business if output sales tax is less than input sales tax in a period
How Sales Tax is Levied
- Sales tax represents a cumulative tax collected through different phases of a product's life
- It may be known as goods and services tax (GST), or value added tax (VAT)
- Sales tax rate for items is 15%
- Manufacturer purchases raw materials and components for $40, pays $6 in sales tax, totaling $46
- Manufacturer sells television to wholesaler for $200, sales tax is $30, totaling $230
- Wholesaler purchases television for $200, sales tax is $30, totaling $230
- Wholesaler sells television to retailer for $320, sales tax is $48, totaling $368
- Retailer purchases television for $320, sales tax is $48, totaling $368
- Retailer sells television to consumer for $480, with sales tax being $72, totaling $552
- Consumers purchase television for $480, and the corresponding sales tax of $72, totaling $552
- The ultimate consumer bears the combined cost of $72, but the tax is remitted to authorities incrementally
- Tax authorities would collect sales tax as follows: Supplier of materials and components $6, Manufacturer $24, Wholesaler $18, Retailer $24; total $72.
Input and Output Sales Tax
- Output sales tax references to the sales tax levied on goods and services sold by a business
- Input sales tax refers to the sales tax a business pays on goods and services "bought in"
Obligations of Sales Tax Registered Traders
- Collected sales tax should be charged at the government's prescribed rate, named output sales tax
- Sales tax should be paid on goods/services purchased from other businesses, named input sales tax
- A sales tax return should be submitted carrying the the amount collected on sales, and sales tax paid to suppliers for purchases
Irrecoverable Sales Tax
- Traders cannot always reclaim sales tax paid on their inputs
- In this case, the cost of expenses and non-current assets purchased will include irrecoverable sales tax
Calculation of Sales Tax
- Gross amount refers to the amount including sales tax
- Net amount refers to the amount excluding sales tax
Sales Tax Based Upon Net Amount
- Net amount is $100
- Sales tax is $100 * 15% = $15
- Gross amount is $100 + $15 = $115
Sales Tax Based Upon Gross Amount
- Gross amount is $80
- Net amount = $80 / (1 + 0.15) = $69.57
- Sales tax = $80 - $69.57 = $10.43
Accounting for Sales Tax
- Sales tax is collected on behalf of the tax authorities
- Outstanding payable for sales tax is a current liability in the statement of financial position
- If sales tax paid to suppliers exceeds sales tax collected from customers, it is a current asset
Statement of Profit or Loss
- Businesses make no profit from sales tax
- An accounting entry to record sales: Dr. Cash or trade receivables control account $690, Cr. Sales $600, Cr. Sales tax payable (output sales tax) $90
- An accounting entry to record purchases: Dr. Purchases $400, Dr. Sales tax payable (input sales tax recoverable) $60, Cr. Cash or trade payables control account $460
- Note that transactions recorded include the total amount, as this is what businesses owe the supplier
- Non-recoverable input sales tax must be included in the cost of purchases
- Irrecoverable input sales tax should me included in the statement of profit or loss but recoverable input sales tax should be excluded and output sales tax excluded
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