Financial Accounting · Receivables and payables

Sales Tax Accounting Entries for Receivables and Payables

Updated 11 October 2026 · Fact-checked

Sales tax is collected on behalf of the tax authority, so it is not income or expense for a registered business. Output tax on sales is credited to the sales tax account. Input tax on purchases is debited to it. The balance is paid to, or reclaimed from, the authority.

Understand Sales Tax in Recording Receivables and Payables

Sales tax (VAT or GST in many countries) is a tax on the value added at each stage of trade. A registered business charges it to customers and pays it to suppliers. It is only a middleman. The tax belongs to the tax authority, not to the business.

Output tax is the sales tax you charge on your sales. It is a liability, because you owe it to the authority. Input tax is the sales tax you pay on your purchases and expenses. It is normally recoverable, so it reduces what you owe.

Because of this, sales and purchases are recorded net of sales tax. The tax goes to a separate sales tax account. Customers owe you the gross amount (net plus tax), so receivables are recorded gross. You owe suppliers the gross amount too, so payables are recorded gross.

The sales tax account is a running total. A credit balance means you owe the authority. A debit balance means the authority owes you a refund. When you pay or receive money, the entry goes through the bank and clears the account.

Sometimes input tax cannot be recovered. Examples are tax on business entertainment of customers (in many tax systems) or purchases made when not registered. Then the irrecoverable tax is part of the cost of the item. You include it in the purchase or expense, or in the asset's cost.

Key formulas to remember

Gross, net and tax: Gross = Net + Sales tax; Sales tax = Net × rate; If you are given the gross amount, Net = Gross ÷ (1 + rate) and Tax = Gross × rate ÷ (1 + rate).
Credit sale entry: Dr Receivables (gross); Cr Sales (net); Cr Sales tax (tax); Output tax is a liability.
Credit purchase entry: Dr Purchases (net); Dr Sales tax (tax); Cr Payables (gross); Applies when input tax is recoverable.
Irrecoverable input tax: Dr Purchase or expense (net + tax); Cr Payables or bank (gross); No debit to the sales tax account.
Amount due to the authority: Output tax − Recoverable input tax; Positive means you pay. Negative means you reclaim.
Settlement: Pay: Dr Sales tax, Cr Bank. Refund: Dr Bank, Cr Sales tax; This clears the balance on the sales tax account.

How to solve Sales Tax in Recording Receivables and Payables questions

Use this method for any sales tax ledger question. Work from the net amount, because tax is always calculated on it.

1Decide whether each figure given is net or gross. Look for words such as 'including sales tax' or 'exclusive of tax'.
2Find the net amount and the tax. If you have the gross, divide by 1 + rate to get net.
3For each sale, debit receivables with gross, credit sales with net, and credit sales tax with the tax.
4For each purchase or expense, debit the cost with net, debit sales tax with the tax, and credit payables with gross.
5Check for irrecoverable input tax. If the tax cannot be recovered, add it to the cost and do not post it to the sales tax account.
6Total the sales tax account. Credits less debits gives the amount owed to the authority.
7Record any payment to or refund from the authority through the bank, then state the closing balance.

Quickest way: Net-first shortcut for objective tests

When to use it: Use it for number entry and multiple choice questions that ask for a ledger balance or a tax figure.

Write NET, TAX, GROSS in a quick line and fill in the one you know.
Gross to tax: multiply by rate ÷ (1 + rate). For 20% that is 1/6, for 10% it is 1/11.
Sales tax account: add up the output tax on the credit side and recoverable input tax on the debit side, then subtract.
Ask whether the question wants the receivable, the sales figure or the tax. They are three different numbers.
Scan the options for the trap answer that uses gross where net is needed.

Common mistakes in Sales Tax in Recording Receivables and Payables

Recording sales or purchases gross of tax.
The invoice total is the most visible number.
Fix: Post the net amount to sales or purchases. Only the receivable or payable is gross.
Calculating tax from a gross amount as gross × rate.
Students forget the gross already includes the tax.
Fix: Use gross × rate ÷ (1 + rate), or divide by 1 + rate to get net first.
Debiting output tax or crediting input tax in the sales tax account.
Students mix up which side is a liability.
Fix: Remember: output tax is owed, so it is a credit. Input tax is reclaimed, so it is a debit.
Debiting irrecoverable input tax to the sales tax account.
Students apply the normal purchase entry automatically.
Fix: If the tax cannot be recovered, include it in the cost of the item.
Treating sales tax as an expense in profit or loss.
Students see it as a cost of trading.
Fix: For a registered business, recoverable tax is only a balance with the authority and never affects profit.
Forgetting that the sales tax balance can be a debit.
Most practice examples show a liability.
Fix: If input tax exceeds output tax, the debit balance is a refund due and is shown as a receivable.

Worked examples

Example 1

A business has sales tax at 20%. In a month it makes credit sales of $60,000 (excluding tax) and credit purchases of $36,000 (excluding tax). Prepare the entries and calculate the sales tax due to the authority.

Show the solution

Output tax on sales: $60,000 × 20% = $12,000. Receivables are $60,000 + $12,000 = $72,000.
Sales entry: Dr Receivables $72,000; Cr Sales $60,000; Cr Sales tax $12,000.
Input tax on purchases: $36,000 × 20% = $7,200. Payables are $36,000 + $7,200 = $43,200.
Purchases entry: Dr Purchases $36,000; Dr Sales tax $7,200; Cr Payables $43,200.
Sales tax account: credit $12,000, debit $7,200. Balance is $12,000 − $7,200 = $4,800 credit.

Answer: The business owes the tax authority $4,800, shown as a credit balance on the sales tax account.

Example 2

A business buys goods on credit for $4,600 including sales tax at 15%. It also pays $1,150 including tax for customer entertainment, and the tax on this is irrecoverable. State the amounts debited to purchases, to entertainment expense and to the sales tax account.

Show the solution

Goods: net = $4,600 ÷ 1.15 = $4,000. Tax = $4,600 − $4,000 = $600.
Entry for goods: Dr Purchases $4,000; Dr Sales tax $600; Cr Payables $4,600.
Entertainment: tax is irrecoverable, so the full $1,150 is the expense.
Entry: Dr Entertainment expense $1,150; Cr Bank $1,150.
Total debit to the sales tax account is $600 only.

Answer: Purchases $4,000; entertainment expense $1,150; sales tax account debit $600.

Exam tips

Read whether the amounts are 'including' or 'excluding' tax before you calculate anything.
In multiple response questions, check each option for which side of the sales tax account it uses.
For number entry, work to the precision asked and do not enter currency symbols or commas unless the question shows them.
Watch for the irrecoverable input tax wording. It changes the cost figure and removes the debit from the sales tax account.
Sales tax payments and refunds go through the bank. They never appear in profit or loss.

Practice questions from Receivables and payables

Sales Tax in Recording Receivables and Payables: frequently asked questions

What is the difference between input tax and output tax?

Output tax is the sales tax you charge customers on your sales. Input tax is the sales tax you pay suppliers on purchases and expenses. You pay the authority the output tax less the recoverable input tax.

Why are receivables recorded gross of sales tax?

The customer owes you the full invoice amount, which includes the tax. You then pass the tax to the authority. Sales are recorded net because the tax is not your income.

Is sales tax an expense?

Not for a registered business when the tax is recoverable. It is a balance owed to or by the tax authority. It becomes part of the cost only when it is irrecoverable.

What happens if input tax is greater than output tax?

The sales tax account has a debit balance. The authority owes you a refund. It is shown as a receivable until it is received.