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 

 

228

 

For example, if the gross amount of a purchase is $80, and the rate of sales tax is 15%, the sales tax 

and net amounts are as follows. 

Gross amount  

 

 

 

 

 

 

= $80 

Net amount    

 

 

= $80 / (1+ 0.15)   

= $69.57 

Sales tax 

 

 

 

= $80 – $69.57 

 

= $10.43 

 

2

   Accounting for sales tax 

2.1 Statement of profit or loss 

Sales tax charged on sales is collected by the business on behalf of the tax authorities. It does not form 

part of the revenue of the business. For example, if a business sells goods for $600 + sales tax $90, ie 

for $690 total price, the sales account should only record the $600 excluding sales tax. The accounting 

entries to record the sale would be as follows. 

DEBIT 

Cash or trade receivables 

$690 

CREDIT Sales 

  $600 

CREDIT 

Sales tax control account (output sales tax)  

 

$90 

If input sales tax is recoverable, the cost of purchases should exclude the sales tax and be recorded net 

of tax. For example, if a business purchases goods on credit for $400 + sales tax $60, the transaction 

would be recorded as follows. 

DEBIT Purchases 

$400 

DEBIT 

Sales tax control account (input sales tax recoverable) 

$60 

CREDIT Trade 

payables 

  $460 

If the input sales tax is not recoverable (irrecoverable), the cost of purchases must include the tax, ie 

purchases would be $460 in the example above, because it is the business itself which must bear the 

cost of the tax. 

 

2.2 Sales tax in the cash book, sales day book and purchase day book 

When a business makes a credit sale the total amount invoiced, including sales tax, will be recorded in 

the sales day book. The analysis columns will then separate the sales tax from the sales income of the 

business as follows. 

SALES DAY BOOK 

     

Sales 

 

Date Invoice 

Customer 

Total 

income 

Sales 

tax 

 

 

 

$ 

$ 

  $ 

10 Jan 20X1 

247 

A Detter and Sons 

230 

200 

30 

When a business is invoiced by a supplier the total amount payable, including sales tax, will be recorded 

in the purchase day book. The analysis columns will then separate the recoverable input sales tax from 

the net purchase cost to the business as follows.