A sales tax is an important source of revenue for states, counties and municipalities — necessary money that keeps public coffers flush with capital and helps government officials weather a bad economy. Cash coming from sales levies also enables public authorities to embark on infrastructure initiatives, the kind that help foster economic activity down the road.

Sales Tax

A sales tax is a levy imposed on economic events that happen between business partners, whether they be customers, vendors or service providers. A company selling a good or providing a service collects the tax–where applicable–from customers and remits it to the revenue departments of states, counties and townships. For example, a company sells $1,000 worth of merchandise, and the applicable sales tax is 5 percent. As a result, the levy amounts to $50, or $1,000 multiplied by 5 percent. The client remits a total sum of $1,050, or $1,000 plus $50.

Liability

When finance people talk about a liability, debt, financial commitment or obligation, they mean the same thing. A debt is a sum of money a borrower must repay at a given date–generally the maturity date–or through periodic installments, similar to how you repay a mortgage if you bought a house with a bank loan. A company or person may incur a debt without receiving money, though. For example, if you vouch for a friend’s creditworthiness by co-signing a loan application, you’re liable if the acquaintance faces economic tedium and eventually cannot settle the obligation.

Bookkeeping

In the corporate context, the bookkeeping function serves to record transactional information, which typically stems from the web of economic events a business follows every day. A bookkeeper works under the guidance of an accountant to post journal entries accurately, depending on the transaction. The bookkeeper debits an asset or expense account to increase its balance and credits the account to lower its worth. The opposite holds true for a revenue, equity or liability account. Assets, liabilities, equity items, revenues and expenses constitute the quintet of elements a company relies on to build its record-keeping and financial reporting practice. Get the best advisory from small business accounting miami professionals.

Connection

The sales tax a company collects represents a liability because the business is only acting as an agent for government authorities in collecting and hoarding the cash before transferring it into public vaults. To record sales tax money, a bookkeeper debits the cash account and credits the sales tax payable account. When in-house treasurers remit funds, the bookkeeper reverses the prior entry. In accounting terminology, debiting the cash account means increasing company money.