When Tax is collected on retail sales, which account gets credited?

When Tax is collected on retail sales, which account gets credited?

Wondering about the Tax collected? Where do they go, and why do we have to pay for it? Well, we are here to answer your queries and explain how things work.


Tax is a compulsory charge that is to be paid by every legal citizen of the country. There are different kinds of taxes imposed on the people, two of which are mentioned below

  1. Income tax
  2. Sales tax

Want to know when tax is collected on retail sales, which account gets credited? The answer is Sales tax payable. First, let’s have an outlook on what sales tax is.

·         Sales Tax

Sales tax is the quantity surcharged on some goods and services provided. A certain percent of the amount after being calculated, is added to the total. It is obligatory on the buyer to pay it at the time of purchase.

The percentage varies from place to place. The sale tax amount varies from place to place, every state charges a different amount.

One question that must ponder your mind is, why? Why do we pay an additional amount on something we are already paying for? And where does it go?

Simply put, the government, with this fund collected build its resources. these funds act a foundation of the Government capital.

In return, the government uses this money to spend on the people by providing them with a better education structure, build leisure places, hire more public service workers, etc.

·         Sales Tax Payable Account

This type is a liability account. Once the customer pays at the time of purchase, it instantly converts into a liability for the business. Business owners temporarily collect and retain the sale tax amount collected at the time of selling, which they return to the state government at a specific time. It can be monthly or quarterly basis whichever might be suitable for them

Also Check this post: What is a tax imposed on the sellers of a good?

How to calculate Sales Tax?

Here’s is an example of how to calculate sales tax.

Here’s is an example of how to calculate sales tax. For instance, in a hypothetical situation an item costing USD 100 is purchased by person A. This item has a tax applicable on it of 20%, so we would calculate the surcharge by using the following formula


Sales Tax = sales tax rate x total sales

Sales Tax= 100×20/100 = USD 20

Liability Account

Liability accounts are those accounts of business owners which indicate how much they owe. The balance sheet features any business’s liabilities. When there is a debit to liability it decreases, showing that the company/ business does not own much. on the other hand, credit means that the amount to be remitted is increasing.

Accounting the Sales Tax Collected

The product owner collects the tax at the time of selling from the customer and remits to the Government. The business owner acts as a bridge that ties the whole system together. The transactions are recorded in the accounting books.

Furthermore, it can be safely said that the payments; whether it’s customer payment or the business owners receiving it, are recorded through journal entries and are presented at the time of need.

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