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ACCA Applied Knowledge · Financial Accounting · Double-entry bookkeeping principles including the maintenance of accounting records

Tarn Co's sales day book for a month shows invoices with net total $40,000 and sales tax of $8,000 at 20%. Tarn Co's sales returns day book shows net returns of $5,000 plus sales tax of $1,000. What is the net balance on the sales tax account at month end, assuming no other sales tax transactions?

The sales tax account has a net credit balance of $7,000. Output tax on sales of $8,000 is credited, and the $1,000 tax on returns is debited to reduce it. The result is a liability owed to the tax authority.

  1. A$7,000 creditCorrect
  2. B$7,000 debit
  3. C$9,000 credit
  4. D$1,000 credit

Explanation

Sales tax on sales of $8,000 is credited to the sales tax account as a liability. Sales tax on returns of $1,000 is debited, reducing the liability. The net is $8,000 - $1,000 = $7,000 credit, owed to the tax authority. Adding the returns ($9,000) is the key error.

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