Accounting Questions: Sales Tax, Long/Short Term Liabilities
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What are the ramifications to a business of not tracking and paying sales tax?
What is the difference between accounts payable and accrued expenses?
Is short-term or long-term debt more stressful to your personal finances? Why?
Why is it important to differentiate between short-term and long-term liabilities?
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What are the ramifications to a business of not tracking and paying sales tax?
If we assume that the business has collected the sales tax but not recorded it properly, then sales are overstated. The entry to record a sale would have been debit cash $11, credit revenue $11. The proper entry should have been debit cash $11, credit sales taxes payable $1 and credit revenue $10.
The second issue in not tracking sales taxes collected is that liabilities are understated. If the business did not even collect sales taxes, then the entry is debit cash $10, credit revenue $10. When the sales tax is recognized as a proper liability that had not been collected, the entity is still liable for the tax collection and payment. In this case the entry is debit cash $10, credit sales tax payable $1, credit revenue $9. That is the case when sales taxes have not been collected but still must be paid. I used rounded amounts for simplicity.
The third problem is the legal obligation for payment to a governmental entity. There is normally a reporting function and a payment period. ...
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