VAT/Sales Tax

Some sales are subject to VAT/Sales Tax even in a service company. Sales of repair parts, supplies and other items are usually subject to VAT/Sales Tax. In addition to the price of the item itself, the customer pays a tax that is a specified percentage of the price. In principle, the tax is not revenue, as the entity is just acting as a collection agent for the government. The collection of the tax creates a liability to the government, VAT/Sales Tax Payable, which is equal to the debit to Cash or Debtors. As equity is unaffected, there is no revenue.

Nevertheless, many entities include the VAT/Sales Tax as part of sales revenue, because their managers decide the work of keeping track of the tax on each transaction separately is not worthwhile. An entity that takes this shortcut has to remember to record the tax liability to the government.