When affected by sales tax, you on one hand must keep in mind that the tax is not part of your revenue. On the other hand you still must treat the tax on your statements.

It’s one thing declaring the tax – there are declarations, forms etc. applicable in your country and subject to local guidance. Each country has its own specific regulations for which we suggest you consult your local advisor or legislation yourself. 

However, accounting is something that’s most likely the same across accounting standards in various countries.

For our example let’s presume that the gross selling price is 118 and the net selling price is 100. This way as you can see, the tax payable from the sale is 18 (that is 18% of the net selling price). When first making the sale, your accounting entry is as follows:

Db       Account receivable 118

Cr       Sales revenue 100

Cr       Taxes payable 18

Why would you recognize the account receivable as gross? Well, you would do this so because you expect your clients essentially pay the tax and not you yourself. If you think about it, isn’t it always you who pays the invoices gross, that is including the tax as well.

When the tax is paid, you make the following entry:

Db       Taxes payable 18

Cr       Cash and cash equivalents 18

Once your clients pay their balances, you account for the collection:

Db       Cash and cash equivalents 118

Cr       Account receivable 118

With this you’ve accounted for the sale, for the receivable and also paid taxes. Regardless whether the client pays before or after you’ve paid your taxes, you will collect the tax payable from your client.