Page 381 - Accounting Principles (A Business Perspective)

9. Receivables and payables

Estimated liabilities Yes No
Contingent liabilities No No
Clearly determinable liabilities have clearly determinable amounts. In this section, we describe liabilities not

previously discussed that are clearly determinable—sales tax payable, federal excise tax payable, current portions of
long-term debt, and payroll liabilities. Later in this chapter, we discuss clearly determinable liabilities such as notes
payable.
Sales tax payable Many states have a state sales tax on items purchased by consumers. The company selling
the product is responsible for collecting the sales tax from customers. When the company collects the taxes, the
debit is to Cash and the credit is to Sales Tax Payable. Periodically, the company pays the sales taxes collected to the
state. At that time, the debit is to Sales Tax Payable and the credit is to Cash.
To illustrate, assume that a company sells merchandise in a state that has a 6 per cent sales tax. If it sells goods
with a sales price of USD 1,000 on credit, the company makes this entry:

Accounts Receivable (+A) 1,060
Sales (+SE) 1,000
Sales Tax Payable (+L) 60
To record sales and sales tax payable.
Now assume that sales for the entire period are USD 100,000 and that USD 6,000 is in the Sales Tax Payable
account when the company remits the funds to the state taxing agency. The following entry shows the payment to
the state:
Sales Tax Payable (-L) 6,000
Cash (-A) 6,000
An alternative method of recording sales taxes payable is to include these taxes in the credit to Sales. For

instance, the previous company could record sales as follows:
Accounts Receivable (+A) 1,060
Sales (+SE) 1,060
When recording sales taxes in the same account as sales revenue, the firm must separate the sales tax from sales
revenue at the end of the accounting period. To make this separation, it adds the sales tax rate to 100 per cent and
divides this percentage into recorded sales revenue. For instance, assume that total recorded sales revenues for an
accounting period are USD 10,600, and the sales tax rate is 6 per cent. To find the sales revenue, use the following
formula:
Amount recorded forsales account
Sales=
100 per centsales taxrate
USD10,600
= =USD10,000
106 per cent
The sales revenue is USD 10,000 for the period. Sales tax is equal to the recorded sales revenue of USD 10,600
less actual sales revenue of USD 10,000, or USD 600.
Federal excise tax payable Consumers pay federal excise tax on some goods, such as alcoholic beverages,
tobacco, gasoline, cosmetics, tires, and luxury automobiles. The entries a company makes when selling goods
subject to the federal excise tax are similar to those made for sales taxes payable. For example, assume that the
Dixon Jewelry Store sells a diamond ring to a young couple for USD 2,000. The sale is subject to a 6 per cent sales
tax and a 10 per cent federal excise tax. The entry to record the sale is:

Accounts Receivable (+A) 2,320
Sales (+L) 2,000
Sales Tax Payable (+L) 120

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