Sales taxes collected by a retailer are recorded by
A increasing Sales Tax Revenue.
B increasing Sales Tax Expense
C increasing Sales Taxes Payable.
D increasing Sales.
The correct answer and explanation is:
The correct answer is C) increasing Sales Taxes Payable.
Sales taxes collected by a retailer are not considered revenue or expense but are instead a liability for the retailer. When a retailer makes a sale and collects sales tax from the customer, the retailer is required to remit the tax to the appropriate government authority at a later date. The amount of sales tax collected does not represent income for the retailer; it simply represents money that is held temporarily on behalf of the government.
To record the sales tax collected, the retailer increases a liability account called “Sales Taxes Payable.” This account reflects the amount of tax the retailer owes to the tax authorities. For example, when a sale is made and tax is collected, the journal entry would typically involve debiting Cash or Accounts Receivable (for the total amount of the sale plus tax) and crediting Sales Revenue (for the portion of the sale without tax) and Sales Taxes Payable (for the amount of sales tax).
When the retailer later remits the collected taxes to the government, the liability account (Sales Taxes Payable) is debited (reduced) and cash is credited (paid out). It’s important to note that the retailer does not recognize the sales tax as an expense, because it is not an actual cost to the business. Instead, it is merely an obligation to pass the tax on to the government.
This treatment aligns with the principle that sales tax is a pass-through liability. The retailer’s role is to collect the tax and hold it until it is due for payment to the government.