If a company sells $100,000 of product that is subject to a state sales tax of 7%, the company will collect $107,000. It will record sales of merchandise of $100,000 and will record a liability for sales tax of $7,000. In this situation the company is acting as a collection agent for the state by charging the $7,000 in sales tax. The company will have to remit the $7,000 to the state shortly after collecting the money. When the company remits the $7,000 to the state, the company will reduce its cash and its sales tax liability. In this situation 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 $30,000 plus $2,100 of sales tax, the company will record the truck as an asset at its total cost of $32,100. In this situation, the sales tax of $2,100 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.

View Our Course Outline