Is sales tax reported on cash or accrual basis? || Bookkeeper Supporting Services

 

Is sales tax reported on cash or accrual basis?

Is sales tax reported on cash or accrual basis of collecting and paying sales tax? this article will help you how they both work in QuickBooks online?

If you have any questions about QuickBooks Online Sales Tax. You can leave them in the comment section below and I’ll do my best to help you and of course if you feel the article helped you I hope you will click following the blog and get updates on new articles that come out all the time.

How to tell if a tax return is cash or accrual method

Most states give companies that require sales tax a choice of collecting and paying under the accrual method rather than the cash method of accounting.

The accrual method means that the sales tax is owed at the moment you make an invoice.

The cash method means that the sales tax owed is proportional to the amount actually collected on an invoice.

Is sales tax reported on cash basis

Is sales tax reported on cash basis? An invoice was a thousand dollars before tax and the sales tax was a hundred dollars therefore the balance of the whole invoice was one thousand one hundred dollars. if you receive payment for this invoice of five hundred fifty dollars which is half the balance of the invoice the amount of sales tax owed under the cash method would then be only fifty dollars half the tax because half the invoice was paid.

From Accrual to Cash method setup in QuickBooks Online

Now there are two places to consider this in QuickBooks online for change from accrual to cash method in the reports and in the sales tax center.

Now in the reports you can simply change the report that you're looking at from accrual basis to cash basis right on the report.

So that you will see how much you owe if you pay under accrual and you will see how much you owe if you pay under the cash method.

Is sales tax reported on accrual basis?

Is sales tax reported on Accrual basis? The sales tax center requires that you must change the settings in the company settings window or account settings window in order to change the results from cash to accrual.

So here's a practical example that will show you what's going on.

On 10/12/2020 we sold 10 bananas to Betty in Massachusetts on account.

Create Sales Invoice in QuickBooks Online

We’re going to make an invoice we click new invoice we make the date 10/ 12/2020. The customer is Betty the product is bananas we're selling 10. Click that it's taxable and you click based on location and it remembers that Massachusetts tax is the default tax and the amount is $625. Now when we click save and close.

You can see in the reports for the trial balance that for Massachusetts department of revenue. We click here and the very last invoice. That we owe tax for it is now reporting that we owe the entire $625 dollars.

If you click taxes and go to the sales tax center you can see that the amount we owe to Massachusetts has increased by the $625 by the full amount.

Now let's imagine it's two days later and we received payment for exactly one quarter of the balance of the invoice. The money amount that is one quarter of the invoice $2656.25

Create Receive Payment in QuickBooks Online

We click new receive payment and we know that the payment is on 12/ 12/ 2020. We receive the payment from Betty. Now she has several open invoices but this is the one we're receiving the payment for but we're not receiving the full payment of $10625. We’re receiving only 25% of 10625, $2656.25 that the amount in the total received and 2656.25 that's the amount applied to this invoice now we click save and close.

What is the results on the reports?

What is the result on the reports? Well when we click reports trial balance you can see Massachusetts department of revenue payable we double click. We see that the whole amount of $625 is still indicated as owed. 

If we click reports trial balance and we switch from accrual to cash we click run report.  When we open the department of Massachusetts revenue payable. You can see that the amount owed for that invoice is now only 156.25.

The amount of 156.25 tax owed is now showing because we only received one fourth of the payment of that invoice and we ran the report under the accrual method.

well we change the default settings on the report from accrual to cash and then the full amount of $625 showed when it was running under accrual but when we changed it to cash you should we only 156.25  of the sales tax owed because we only received one-fourth of the cash for that invoice.

What is the result in the sales tax center?

What is the result in the sales tax center? Well the sales tax center will still show the full amount owed. We would have to change the defaults in the settings window of the company account and we would have to change the company settings from accrual to cash.

If we do that then the sales tax center will show a proportional amount owed so let's take a look if we click taxes and we look at what's owed for Massachusetts we see it's the full amount that we owed before plus the amount we owe now.

If we change the settings from accrual to cash for the whole company then when we come back to the sales tax center we will see only 156 or whatever owed because we changed it for the whole company.