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Hi there. I have a question regarding sales tax in PA. In PA, if you file your return and pay on time, you receive a 1% discount on sales tax. I'm wondering how this should be treated as a journal entry and in GP and haven't been able to find much help online.
Currently, the Sales Tax Payable account is used to determine how much sales tax is owed to the state. In order to record the liability, we debit the Sales Tax Payable account and credit Accounts Payable. Then, at time of payment, we debit Accounts Payable and credit Cash.
I am unsure how to treat the 1% discount, as it has been previously charged to Bank Fees. That doesn't make much sense to me since it is a discount and not a fee. I assume we need to create a new account titled Sales Tax Discounts (or something similar), but what type of account would this be in regards to our chart of accounts? I was thinking a contra account, either expense or liability, which would need to be closed out to equity at our month closing?
The entry would then be the same to record the liability (debit Sales Tax Payable, credit Accounts Payable), then when we make the payment we debit Accounts Payable and credit Cash and credit Sales Tax Discounts.
I'm not sure if that makes any sense accounting-wise. I believe another issue at hand is using Sales Tax Payable instead of Sales Revenue to record the entry.
Any help is much appreciated! :)
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This is a pretty typical thing, many states give a discount on the sales tax. Here is how we treat it:
We have a GL account called Sales Tax Discounts and Rounding (because sometimes the way the state calculates the tax owed is off by a penny or two from what we have calculated). This is an Other Expense/Income account. In the same area of the Chart of Accounts where you would have Interest Income/Expense. We actually have several different sales tax discounts set up, one for each state we collect sales taxes in.
When we go to file the taxes and calculate the discount, we enter a payables invoice with the State Revenue Department as the Vendor. Let's use an example where the tax liability on our books is $500 and the discount is $5, the invoice would look like this:
Invoice total is $495
Debit Tax Liability account for $500
Credit Accounts Payable for $495
Credit Sales Tax Discount for $5
Then we cut a check against this invoice (or record a manual payment if it's a state where we submit an electronic check).
Hope that helps.
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