How to record sales tax

[Cam Ellison]

Carl Flippin wrote:
> I understand that, when selling, one must keep sales tax in a seperate
> account to make paying sales tax easier. In the case of purchases,
> however, is it better to just include the sales tax as a part of the
> expense or should I have a seperate sales tax expense account?
>
> In case it is not clear, I am a noob to accounting in general. Is
> there a good book to learn best practices for accounting in personal
> finances?
>
>
>   
If you are required to collect sales tax, then you are entitled to 
deduct sales tax that you pay on goods or services you purchase.  You 
should set up a Liability Account with two sub-accounts, one for sales 
tax that you collect, and the other for sales tax that you pay.  Among 
other things, that will give you, in the parent account, the amount that 
you must remit.  It should look something like this:

Liabilities --
                   |-- Sales Tax
                            |-- Sales Tax Collected
                            |-- Sales Tax Paid

The Sales Tax Paid is called a contra account, because it has the 
opposite value to the parent account and the other sub-account.  Amounts 
in Sales Tax Collected will be positive; in Sales Tax Paid they will be 
negative.  If you enter nothing in the Sales Tax account (you 
shouldn't), then in the Chart of Accounts you will see that it has the 
net value of the two child accounts.  You can read more about contra 
accounts in the wiki.

Cheers

Cam