Prepaid Sales Tax

  • Accounts you will need to handle prepaid sales tax:
    1. State Sales Tax Liability [Current Liability]
    2. Prepaid State Sales Tax [Current Asset]
    3. Vendor's Compensation [Other Income]
    4. Sales Tax Adjustment [Expense]
    5. If you are in Orleans Parish, Louisiana, add these two accounts:
      1. Orleans Parish Sales Tax Liability [Current Liability]
      2. Prepaid Orleans Parish Sales Tax [Current Assets]

  • Posting the Purchases Invoice
    1. Post a Purchases invoice to these accounts:
      1. Credit the total amount of the invoice to Accounts Payable.
      2. Debit the purchase amount before adding the sales tax.
      3. Debit the sales tax to Prepaid State Sales Tax.
      4. If in Orleans Parish, Debit the applicable amount of sales tax to Orleans Parish Sales Tax.
    2. Take note that you are not charging the prepaid sales tax to Sales Tax Liability. You are charging it to as asset account. Prepaid Sales Tax is like "money in the bank."

  • Post Daily Receipts or invoiced sales as follows:
    1. Debit Checking or Accounts Receivable, whichever is appropriate.
    2. Credit appropriate income accounts.
    3. Credit Sales Tax Liability.

  • Post payment of the Sales Tax Return:
    1. Credit the amount of the check to the checking account.
    2. Find the amount of the sales tax liability on the sales tax return before subtracting the prepaid sales tax and the vendor's compensation. Debit this amount to either State Sales Tax Liability or Orleans Parish Sales Tax Liability.
    3. Find the Vendor's compensation. Credit this amount to Vendor's Compensation.
    4. Find the amount of prepaid sales tax claimed on the return. Credit this amount to Prepaid State Sales Tax or Prepaid Orleans Parish Sales Tax.
    5. Explanation:
      1. The only Debit in this transaction is to State Sales Tax Liability. It means that you are paying the State Sales Tax Liability.
      2. The Credits mean "and you are paying it by using up the Prepaid Sales Tax, getting a small adjustment for going through the trouble of collecting the tax, and writing a check out of your checking account for the balance.

  • Adjusting the "left-overs":
    1. Use the Chart of Accounts icon to go to the Sales Tax Liability ledger [account]. Look at the balance on the last date of the month for the sales tax return you just posted. In theory, the balance should be zero. But it will probably have a few cents because the figures on the sales tax return are rounded off to whole dollars. There might be a few dollars' difference due to simple human error. If the amount remaining is less than $10.00, add or subtract an amount that would bring the amount to zero if it had been dated the same last date of last month. Charge it to Sales Tax Adjustment. Date the adjustment the same day as the date the sales tax return was paid.
    2. Do the same for Prepaid Sales Tax.
    3. If the amounts to be adjusted are greater than $10.00, either you did not adjust these accounts in the previous month or the sales tax returns are wrong.

  • This procedure must be repeated routinely each month as part of the process of paying the sales tax return.