I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART D: RECORDING TRANSACTIONS AND EVENTS 

 

226

 

 

Study Guide 

Intellectual level 

 

 

D  Recording transactions and events 

 

 

 

1 Sales 

and 

purchases 

 

 

 

(c)  Understand the general principles of the operation of a sales 

tax. 

K 

 

 

(d)  Calculate sales tax on transactions and record the 

consequent accounting entries. 

S 

 

 

 

 

 

 

1

   The nature of sales tax and how it is collected 

Sales tax is an indirect tax levied on the sale of goods and services. It is usually administered by the 

local tax authorities.  

1.1 How is sales tax collected? 

Sales tax is a cumulative tax, collected at various stages during the life of goods or services. In the 

illustrative example below, a manufacturer of a television buys materials and components and then sells 

the television to a wholesaler, who in turn sells it to a retailer, who then sells it to a customer. It is 

assumed that the rate for sales tax is 15% on all items. All the other figures are for illustration only. 

1.2 Example 

 

 

 

Price net 

Sales tax 

Total 

 

 

 

of sales tax 

15% 

price 

 

 

 

$ 

$ 

$ 

(a) 

(i) 

Manufacturer purchases raw materials 

 

 

 

 

 

   and components 

 40 

 6 

 46 

 

(ii) 

Manufacturer sells the completed television 

 

 

 

 

 

   to a wholesaler  

 200 

 30 

 230 

 

 

The manufacturer hands over to tax authorities   

 

 24 

 

(b) 

(i) 

Wholesaler purchases television 

 200 

 30 

 230 

 

(ii) 

Wholesaler sells television to a retailer 

 320 

 48 

 368 

 

 

Wholesaler hands over to tax authorities 

 

 18 

 

(c) 

(i) 

Retailer purchases television  

 320 

 48 

 368 

 

(ii) 

Retailer sells television  

 480 

 72 

 552 

 

 

Retailer hands over to tax authorities 

 

 24 

 

(d) 

 Customer purchases television  

480 72 

552 

The total tax of $72 is borne by the ultimate consumer but is collected on behalf of the tax authorities at 

the different stages in the product's life. If we assume that the sales tax of $6 on the initial supplies to 

the manufacturer is paid by the supplier, the tax authorities would collect the sales tax as follows. 

 

$ 

Supplier of materials and components 

6 

Manufacturer 

 24 

Wholesaler 

 18 

Retailer 

 24 

Total sales tax paid 

 72 

So sales tax does not affect the statement of profit or loss, unless it is irrecoverable (see below), but is 

simply being collected on behalf of the tax authorities to whom a payment is made. 

BPP Tutor Toolkit Copy

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CHAPTER 13  

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  SALES TAX