3RQ - Horngren'S Financial And Managerial Accounting

Question

How is sales tax recorded? Is it considered an expense of a business? Why or why not?

Step-by-Step Solution

Answer

No, sales tax is not considered an expense of a business.

Step 1: Meaning of Sales tax

Sales tax payable is a liability that must typically be settled within a year after collection. Therefore, it falls under the category of current or short-term liabilities. As a result, the outstanding sum is shown on the balance sheet under current liabilities.

Step 2: Explanation of sales tax is an expense of business or not

No, sales tax is not an expense to the company but a current liability. The company collects the customers' sales tax and sends it regularly to the state. Usually, they submit it every month, but sometimes the company pays it frequently to the state, depending on the state and the amount of the tax.