Sales Tax Question

[Pranterina]

A business in its first period of trading charges $4,000 of sales tax on its sales and suffers $3,500 of sales tax on its purchases which include $250 sales tax on business entertaining.

sales tax payable account...txt

Could anyone explain to me why Paybables is on the debit side and Receivables is on the credit side?

thank you very much!

[Sonal]

Hi Pranterina,

The following are the journal entries related to the sales tax:

Sales tax on sales:
Dr Trade Receivable .....$4,000
.....Cr Sales Tax payable............. $4,000

Sales tax on purchases:
Dr Sales Tax payable .....$3,250 (i.e. 3,500 - 250)
.....Cr Trade Payables ..... ..... ..... $3,250

in the sales tax account,

• payables is on dr side because payables have increased but the amount of sales tax payable has decreased.
• receivables is on cr side because both receivables and he amount of sales tax payable has increased.

(Note that in the receivables a/c, sales tax payable will be recorded on debit side and in the payables a/c, sales tax payable will be recorded on credit side)

Hope this helps