[GNC] gnucash-user Digest, Vol 213, Issue 45

[David Cousens]

Eric,

It is a little unclear from your description but I assume the situation with
the sales tax is that if it is on or on a component of   goods sold as part
of your business then it is passed on to your customer if the vendor has
charged it and you add an additional component where you have added value to
the item sold whereas if it is on goods for your own consumption you have to
show that the tax has been paid if your vendor has charged you the tax on
the goods he sold to you and if you have not been charged for any sales tax,
you become liable to pay the tax. The treatment will depend a lot on the
details of the specific legislation applying. If your accountant is not
giving you any specific guidance in how to do this I would be looking for
another accountant - this is what you are paying him for  (a similar
situation is also the reason I ended up with a masters degree in
accounting).

In accounting this sort of situation is handled by what are commonly known
as contra accounts. for example you will have a liability account
Liability:Sales Taxes which you will credit in the case where you have to
charge and later pay tax to the state. In the situation where sales taxes
you have paid can be offset against the tax you owe the state you would set
up an account structure something like the following where the colon
indicates a sub account. 

Liability: Sales Taxes
Liability: Sales Taxes: Due on Sales
Liability: Sales Taxes: Paid on Purchases
Liability: Sales Taxes: Paid to State

The Liability: Sales Taxes would be a placeholder account and the other
three sub accounts sum into it. It is likely you will need to setup similar
separate structures for both your goods which are purchased for sale and for
goods which are consumed by your business which you would pass on as an
overhead cost to your cost of goods sold.

When you purchase something and the tax component of the purchase is
offsettable against your tax owed you would debit the tax amount to
Liability: Sales Taxes: Paid on Purchases. When you sell something and have
to charge sales tax or when you are liable for the tax on a purchase you
would create a credit entry in Liability: Sales Taxes: Due on Sales. When
you pay the state the taxes you owe you create a debit entry to Liability:
Sales Taxes: Paid to State balanced by a credit entry to your bank account.

Entries for your out of state purchase for $100 not including tax on which
you have to pay tax would be for example
                                                                    Debit              
Credit
Expenses: Office Supplies                         108.25
Liability: Sales Taxes: Due on Sales                                    
8.25
Assets:Bank account                                                        
100.00

In a situation where a similar purchase includes sales tax which you are
entitled to offset against the tax you owe you would for example record it
as
                                                                    Debit              
Credit
Expenses:Office Supplies                           100.00
Liability: Sales Taxes: Paid on Purchases      8.25
Assets:Bank account                                                         
108.25

A sales entry for goods sold from your business where you have charged tax
might look like
                                                                    Debit              
Credit
Assets:Bank account                                  108.25
Revenue: Sales                                                                 
100.00
Liability: Sales Taxes: Due on Sales                                     
8.25

When you pay your taxes  to the state they would be recorded as
                                                                    Debit              
Credit
Liability: Sales Taxes: Paid to State            xxx.xx
Assets:Bank account                                                          
xxx.xx

The Liability: Sales Taxes balance will always tell you what you owe the
state. The transactions in the sub-accounts between filing dates  should
basically give you what you need in filing returns although they may need
additional structuring to meet the specific needs of your jurisdiction.

The cost accounting for COGS and applicable taxes is a lot more complex but
works on similar principles.

The above should not be construed as accounting advice and is purely
illustrative of a general approach which may prove useful for you. I am not
in the US and I am not familiar with US tax laws or those pertaining to your
situation and the above general approach may require considerable
modification to meet those requirements.

David Cousens



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David Cousens
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