Is sales tax an expense or a liability PDF

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Is sales tax an expense or a liability? Definition of Sales Tax In the U.S., a sales tax is a state tax (and possibly an additional local tax) that is paid by the buyer at the time of purchase. The amount of the sales tax is based on the product and the sales tax rate. For instance, in some states unprepared grocery items are not subject to a sales tax. Items purchased for resale are not subject to the sales tax when purchased by the retailer, but will be subject to the sales tax when the items are sold to the end customer. In some cities, there could be a state sales tax of 6% plus a county tax of 1% and a tourist district sales tax of 3%. In another state there could be only a sales tax rate of 8%.

The sales taxes collected by a merchant are not part of the merchant's sales and are not part of the merchant's expenses. Instead, the merchant is merely an agent of the state and will record the sales taxes collected as a current liability. When the merchant remits the sales taxes to the state, the current liability account is reduced.

If a company purchases a new delivery van, the sales taxes paid on the van are recorded as part of the cost of the van. The total cost of the van will then be charged to depreciation expense over the van's useful life.

Examples of Sales Tax If a company sells $100,000 of merchandise that is subject to a state sales tax of 7%, the company will collect $107,000. The journal entry to record this information is: 

Debit Cash for $107,000



Credit Sales (or Sales Revenues) for $100,000



Credit Sales Taxes Payable for $7,000

When the company remits the $7,000 to the state, the company will credit Cash and debit Sales Taxes Payable. Note that in this example that the sales tax is not an expense and it is not part of the company's sales revenues.

If a company purchases a new delivery van for $50,000 plus $3,500 of sales tax, the company will record the truck as an asset at its total cost of $53,500. In this situation, the sales tax of $3,500 is considered to be a necessary cost of the truck and will be part of the depreciation expense recorded during the useful life of the truck.

What is a customer deposit? Definition of Customer Deposit A customer deposit could be money that a company receives from a customer prior to the company earning it (by providing the customer with goods or services). In other words, the company receives the asset Cash and has an obligation to provide the goods or services to the customer or to return the money. Hence, the current liability account Customer Deposits is credited. When the company earns the deposit amount, the current liability will be debited and Sales Revenues will be credited.

A customer deposit could also refer to the money a bank receives from a depositor. Since the bank is not earning this money, the amount is recorded by the bank with a debit to Cash and a credit to Customer Deposits.

Example of Customer Deposit Let's assume that Ace Manufacturing Inc. agrees to produce an expensive, custom-made machine for one of its customers. Ace requires that the customer pay $50,000 before Ace

begins to design and construct the machine. The $50,000 payment is made in December 2020 and the machine must be finished by March 31, 2021. The $50,000 is a down payment toward the machine's price of $400,000.

In December 2020 Ace will debit Cash for $50,000 and will credit Customer Deposits, a current liability account. When the machine is completed in 2021, Ace will debit Customer Deposits for $50,000 and will credit Sales Revenues for $50,000.

How do you account for a project under construction? Accounting for a Project Under Construction If a company is constructing a major project such as a building, assembly line, etc., the amounts spent on the project will be debited to a long-term asset account categorized as Construction Work-in-Progress.

Construction Work-in-Progress is often reported as the last line within the balance sheet classification Property, Plant and Equipment.

There is no depreciation of the accumulated costs until the project is completed and the asset is placed into service.

When the completed asset is placed into service, the project's accumulated costs will be removed from the Construction Work-in-Progress account and will be debited to the appropriate plant asset account....