Sales Tax is Liablity

Sales Tax is a liability because you receive it from your customer . Therefore you are just a collecting agent of sales tax on the behalf of Govt and it is not a direct expenses for your business. Normally the business pay sales tax on purchases and record it as asset and receive sales tax record it as liability and difference between sales tax receive and sales tax paid is deposited into Govt treasury.



Example of Sales Tax

A purchases of 2000 and paid sales tax @ 10 and made sales of 3000 and receive sales tax . what would be the payment of sales tax.


Purchases       2000    Dr.
Sales Tax         200    Dr.
Cash               2,200   Cr.

Entry No 2

Cash          3,300  Dr.
Sales         3,000  Cr.
Sales Tax     300  Cr.


Sales Tax Liability is 300 Cr- 200 Dr = 100 Cr.