A sales tax is a tax a business must collect from customers and pay to the appropriate tax authorities, such as the state in which the business is located. This collection and payment process requires two separate journal entries in your records – one at the time of sale and another when you pay the tax authority.

Sales tax has no effect on your revenues or expenses.

When you complete a sale, the amount of sales tax you charge the customer becomes a liability, or money you owe. When you pay the tax, the required journal entry removes the liability.

Include Sales Tax in Your Sale

Add the sales price of the product or service you sold to the total sales tax you charged your customer.

For example, assume your small business sold a $200 product and charged 10 percent sales tax, or $20, which consists of state, county and city taxes. Add $200 and $20 to get $220.

Debit the Sale

Debit the total to the accounts receivable account in a new journal entry in your accounting journal if your customer made the purchase on credit. Alternatively, debit the cash account if the customer paid cash. A debit increases accounts receivable and cash, which are asset accounts on your balance sheet.

In this example, assume the customer paid cash. Debit $220 to the cash account in a new journal entry.

Credit the Sale and the Sales Tax

Credit the amount of the sales price to the sales account in the same journal entry. A credit increases the sales account on your income statement.

In this example, credit $200 to the sales account.

Credit the amount of the sales tax to the sales taxes payable account in the same journal entry. A credit increases this account, which is a liability on your balance sheet.

In this example, credit $20 to the sales taxes payable account.

Finalize Your Accounting

Debit the amount of sales tax you pay the tax authority to the sales taxes payable account in a new journal entry when you send the payment. A debit decreases the sales taxes payable liability account.

In this example, assume you paid $500 in sales taxes that you collected over the past month to the local government. This includes the $20 you recently recorded. Debit $500 to the sales taxes payable account.

Credit the cash account by the same amount in the same journal entry. The credit reduces the cash account by the amount you paid.

Concluding the example, credit $500 to the cash account.

Tip

Although states often collect state, county and city sales taxes in one payment, some cities and counties require a separate payment.

Record different payments in separate journal entries.