The payable includes the amount of sales tax since it will be paid to the supplier. Purchases are recorded net of sales tax because any input tax paid on the purchases will be recovered from tax authorities and hence, does not form part of the expense. Sales Tax account is debited since this is the amount of sales tax recoverable from the tax authorities.
The accounting entry to record credit purchases involving sales tax will therefore be as follows:
|Debit||Sales Tax (Receivable) (Tax Amount)|
|Debit||Purchases (Net Amount)|
|Credit||Payable (Gross Amount)|
Subsequent payment of dues to the supplier will result in the following double entry:
|Debit||Payable (Gross Amount)|
|Credit||Cash (Gross Amount)|
Bike LTD purchases a mountain bike from BMX LTD for $115 on credit. Sales tax is 15%.
As the purchase of $115 includes an element of sales tax, we need to first separate tax from the gross amount. Input tax on the transaction may be calculated as follows:
Sales Tax: 115 x 15/115 = $15
Deducting sales tax from the gross purchase, we may now arrive at the tax exclusive purchase value:
Tax Exclusive Purchases: 115 - 15 = $100
This is the amount to be recognized as purchases in the income statement. Payable will be recorded for the entire amount of $115 because sales tax on purchases will also be paid to supplier. The accounting entry will therefore be as follows:
|Debit||Sales Tax (Receivable)||15|
|Credit||BMX LTD (Payable)||115|
Upon payment of the amount payable to BMX LTD, following double entry will be made:
|Debit||BMX LTD (Payable)||115|
The sales tax receivable of $15 will stand till it is recovered from tax authorities.