Problem 25 - Accounting

Question

Journalize the entries to record the following selected transactions: a. Sold \(\$ 3,400\) of merchandise on account, subject to a sales tax of \(5 \%\). The cost of the merchandise sold was \(\$ 2,000\). b. Paid \(\$ 41,950\) to the state sales tax department for taxes collected.

Step-by-Step Solution

Answer

Journal Entries: 1. Debit A/R $3,570, Credit Sales $3,400, Credit Sales Tax Payable $170. 2. Debit COGS $2,000, Credit Inventory $2,000. 3. Debit Sales Tax Payable $41,950, Credit Cash $41,950.

Step 1: Account for the Sale of Merchandise

When merchandise is sold on account, we need to record both the revenue from the sales and the cost of goods sold. The sales tax collected from the customer should also be taken into account. First, calculate the sales tax: \[ 3,400 \times 0.05 = 170 \]Total amount due from the customer is the merchandise sold plus sales tax:\[ 3,400 + 170 = 3,570 \]The journal entry for this transaction would be: - Debit Accounts Receivable \(3,570\) - Credit Sales \(3,400\) - Credit Sales Tax Payable \(170\)

Step 2: Record Cost of Goods Sold

To reflect the reduction in inventory and recognize the cost of the merchandise sold, we must also journalize the cost of goods sold. The journal entry would be:- Debit Cost of Goods Sold \(2,000\) - Credit Inventory \(2,000\)

Step 3: Payment to the State Sales Tax Department

When the company pays the state sales tax department, it needs to record this payment as a reduction in the liability for sales taxes payable. The journal entry for paying the state tax department is:- Debit Sales Tax Payable \(41,950\) - Credit Cash \(41,950\)

Key Concepts

Sales Transactions

Sales transactions are at the heart of any business that sells goods or services. When a company sells merchandise, it creates revenue, which is a representation of its core business activity. In retail or wholesale settings, sales transactions often involve selling goods directly to consumers or businesses.
These transactions can be on a cash basis, where the payment is immediate, or on an account basis, where the payment is due at a future date, known as sales on account. Recording transactions on account requires recognizing the total amount due, which includes the sales price and any applicable taxes.
It's important for businesses to accurately journalize these transactions to keep track of what their customers owe them (accounts receivable). This way, they can manage their finances better and ensure that they collect all the money they're owed.

Sales Tax Accounting

Sales tax is a government-mandated fee added to the sale of goods and services. It is the responsibility of the seller to collect this tax from the purchaser at the time of sale and remit it to the government.
When a transaction includes sales tax, the company needs to calculate the amount of tax based on the tax rate applied to the purchase amount. For example, if you sell \( \$3,400 \) worth of merchandise with a \( 5\% \) sales tax, the tax would be \[ 3,400 \times 0.05 = 170 \]. Therefore, the total due from the customer would be \[ 3,400 + 170 = 3,570 \].
In accounting, this sales tax is recorded as a liability under 'Sales Tax Payable' until it is paid to the government. This ensures that the company is accurately tracking the sales tax collected and what is due to be paid, which helps avoid penalties for incorrect filings.

Cost of Goods Sold

The Cost of Goods Sold (COGS) is an essential concept in accounting, reflecting the expense directly associated with manufacturing or purchasing the goods that a company sells. It includes the cost of materials and labor used to produce the products.
When merchandise is sold, the company must record the reduction in inventory and recognize the expense associated with these goods. For example, if merchandise with a cost of \( \$2,000 \) is sold, the entry would reduce inventory and reflect this cost as an expense.
Recording the COGS is crucial for calculating a company's gross profit, which is the revenue from sales minus COGS. This figure provides valuable insight into the profitability of the business's core activities and helps in financial analysis.

Accounts Receivable

Accounts Receivable (AR) represents the money owed to a business by its customers who purchased goods or services on credit. Managing accounts receivable effectively is vital for maintaining good cash flow within a business.
When a sale is made on account, the AR is debited to reflect the amount due from customers, which includes both the price of goods sold and any additional sales tax. For instance, if a sale amounts to \( \$3,570 \) including tax, AR is debited by this amount.
It is crucial for businesses to track and regularly follow up on their accounts receivable. This helps in ensuring that they get paid on time and can also offer insights into customer purchasing patterns, creditworthiness, and overall market conditions.