Sales tax applies to most business transactions involving a transfer of goods or services. It is often referred to as a tax on consumption as it is the final consumer of the goods and services that usually incurs tax burden.
The basic principle is that businesses operate as the agent of the tax authority collecting the tax on their behalf and paying it over to them on a regular basis.
The rates of sales tax around the world vary, and therefore the percentage sales tax used in the exam may vary as well. However, it is not the amount of the tax that is important for the exam, but a keen understanding of the principles involved in accounting for that tax, whatever the rate may be.
Whenever a business registered to account for sales tax makes a taxable supply of goods or services, it must charge its customers sales tax on all goods or services to which the tax applies. The basic calculation is to take a percentage of the invoice total (after deducting any trade discounts) and to round this amount down to the nearest cent or penny
Therefore, for goods with a list price of $50.00 on which a 10% trade discount is allowed, and settlement discount of 3% (which was expected to be taken up by the customer) the net amount would be $43.65 (shown below) on which sales tax at the appropriate rate calculated and added.
| List price | $50.00 |
| Less: trade discount | $5.00 |
| Less: settlement discount | $1.35 (i.e. 3% x $45.00) |
| Net | $43.65 |
If a business is registered to account for sales tax, it must charge sales tax on its sales and must issue a sales tax invoice. To be a valid sales tax invoice, certain information must be included on the invoice.
All sales tax registered businesses will have a unique registration number. The requirement to include this number on the invoice enables the tax authorities to determine whether the invoice was raised by a valid registered business.
The tax point on an invoice is the date when a transaction is deemed to have taken place for sales tax purposes.
The rate of sales tax on an invoice must be shown. Rates vary from country to country and some countries may have more than one rate. The rate you need to apply in the exam will normally be given to you. Note that the FA 1 syllabus does not include accounting for sales tax on a reduced amount where settlement discount (i.e. prompt payment discount) has been offered. Therefore, sales tax should be calculated on the net amount using the appropriate rate of sales tax.
Complete the following sales invoice details:
| 4 widgets at $100 each | $400.00 |
| 1 grommit at $43 each | $43.00 |
| Sub-total | $443.00 |
| Sales tax at 20% | |
| Amount payable |
Terms Net 30 days.
For a suggested answer, see the 'Answers' section at the