Sales Tax is NOT an Expense on the Profit and Loss Statement

Scott Gregory
August 22, 2008 — 3,138 views  
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We need to take a moment and review a very important point that will make your profit and loss statement a much more meaningful report very quickly.

That point is - sales tax that you collect from your customers is not considered an expense of your business and sales tax should not be listed as an expense item on your profit and loss report.

Your business is simply acting as a "collection agent" for the state sales tax. You charge it to your customers where applicable, they pay it to you, and you turn around and pay it to the state. In some states (Ohio is a good example), they allow you to keep a fraction of the collections by giving a discount for paying the tax on time. This discount is actually income to your business if you deduct it from your sales tax return.

For your accounting records to be set up correctly, you would want to have an account in your chart of accounts called "sales taxes payable" (or something similar). This account would be considered a liability account (remember, a liability is something that the business owes to someone else).

When you collect the sales tax from your customers, the balance of the "sales taxes payable" account will increase (again, because you are collecting it on behalf of your state). Once you write the check out to the state when filing your sales tax return, the balance of the "sales taxes payable" account will decrease again.

By way of example - if you collected $100 from your customers for sales tax during the month, your sales taxes payable account would have a balance of $100 in it until you write the check to pay it. Once the check has been issued, the balance would return to $0. (it's not always quite this simple since your sales tax collections are ongoing, but you get the idea).

Scott Gregory

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Scott Gregory is a QuickBooks Specialist, QuickBooks Enterprise Specialist and CPA. He has been helping businesses gain a better understanding of QuickBooks software and improve their accounting systems for over twenty years. Scott has trained hundreds of QuickBooks users as an instructor at his local community college. Prior to forming Bottom Line Accounting Solutions, Scott was the CFO for a manufacturing company, with direct oversight of the accounting, IT, inventory control, purchasing and HR departments. Contact Scott today at www.BetterBottomLine.com.