Cantrell Company is required by law to collect and remit sales taxes to the state. If Cantrell has $10,000 of cash sales that are subject to a 10% sales tax, what is the journal entry to record the cash sales?
The Correct Answer and Explanation is:
Correct Journal Entry:
Date: [Assumed Date of Transaction]
Dr. Cash $11,000
Cr. Sales Revenue $10,000
Cr. Sales Tax Payable $1,000 300-Word Explanation:
When a company like Cantrell makes sales that are subject to sales tax, it is legally responsible for collecting the sales tax from the customer at the point of sale and remitting it to the appropriate government authority later. The sales tax is not part of the company’s revenue; instead, it is a liability, as the company is acting as an agent for the government.
In this scenario, Cantrell Company has made \$10,000 in cash sales, and these are subject to a 10% sales tax. To calculate the amount of sales tax:
$$
10\% \text{ of } 10,000 = 1,000
$$
Therefore, the total cash received from the customer is:
$$
10,000 (\text{sales}) + 1,000 (\text{sales tax}) = 11,000
$$
Breakdown of the journal entry:
- Debit Cash \$11,000: This represents the actual cash received from the customer, which includes both the sales amount and the sales tax.
- Credit Sales Revenue \$10,000: This reflects the actual revenue earned by the company from the sale of goods or services.
- Credit Sales Tax Payable \$1,000: This is a liability account. Cantrell owes this amount to the government. It is not revenue, and it must be remitted to the state tax authority.
This journal entry correctly separates company revenue from taxes collected on behalf of the government. Later, when Cantrell remits the tax to the government, it will debit the Sales Tax Payable account and credit the Cash account, reducing the liability and cash balance accordingly.
By accurately recording this transaction, Cantrell remains compliant with accounting standards and legal tax obligations.