How do retail business book sales tax?

This is just an idle question that came up when I was trying to help someone with an Excel problem.

Seems to me that it should not be considered revenue, but rather cash in and credit a payable at the sale, then cash out and debit the payable when you pay the government.

I am not anything close to an accountant or bookkeeper but I saw someone taking sales tax into account to calculate margin and that just didn’t seem right to me.

You got it right. Sales tax collected and remitted does not run through the P&L of a business.

The way you expect it to be is correct. Sales tax should never appear as income or expense, but you’d be amazed how often people do it that way - even people who should know better.

I once did some programming for a clothing store. The manager/accountant insisted that Gift Certificates should enter the ledger as a sale, being an item of 100% profit. I left that job a couple of weeks later, but I’ve always had this nagging feeling that it should be like the sales tax, being only a temporary cash/liability, and never entering the sales/profit side of things. I always shuddered what this guy’s profit would look like when a customer USED his gift certificate. Am I right?

When a gift certificate or gift card is issued the company should record it as:

Debit - Cash in
Credit - Unearned Revenue Liability

When someone uses the gift certificate to purchase something the the transaction should be recorded as:

Debit - Unearned Revenue Liability
Credit - Sales
Debit - Cost of Sales
Credit - Inventory

It ultimately makes it to the revenue side, but only when the certificate is used.

They may have been doing this to make income look high and liabilities low. It’s definitely not the accepted way of doing it.

It’s also stupid because you wind up paying the sales tax at the time of the gift certificate purchase, rather than paying the sales tax at the time of redemption.

Except, in a situation like the Canadian Goods and Services Tax - you have a “value added” tax.

You can accept a payment and credit a tax payable, but the GST paid to suppliers for inventory involves a debit against the tax payable.

So if you consider a VATcarefully, it is essentially a profit and payroll tax - since those are the two items that make up the largest part of sales price that do not require VAT paid out on the input.

To add to the comments here (I took several accounting courses in college but IANAA), the whole concept of revenue in accounting is that it doesn’t matter when you actually receive the money–you don’t record revenue until you earn it. If you sell a gift card, you haven’t done anything to earn that money, until you exchange it for goods or services. So I think the manager is violating GAAP (generally accepted accounting principles). This is one reason that stores have tried to put expiration dates on gift cards, or charge a service fee after a certain time, because they don’t like carrying that liability on the books for as long as the gift card sits lost under a customer’s sofa cushion.

(This sort of discussion also comes up with seller agents, like a travel agency claiming $500 in revenue when they sell a plane ticket, even though they only earn a $25 fee on the sale and send $475 to the airline.)