Why does goodwill levy sales tax?

Input tax sales tax

Sales tax taxes the added value of products and services. The input tax is, in turn, a sales tax that the company has to pay when purchasing its goods. In the following article we will show you the sales tax definition and the input tax definition. We will also explain the definition of VAT input tax in more detail and then show you how to post VAT and input tax.

  • Sales tax equals sales tax? - Sales tax Definition and differentiation sales tax Value added tax
    in the text
  • Input tax and sales tax - input tax definition
    in the text
  • Input tax VAT - 1st stage input tax deduction
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  • Input tax VAT - 2nd stage input tax deduction
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  • Input tax sales tax - 3rd stage input tax deduction
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  • Post sales tax input tax
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  • Posting input tax sales tax - 2 cases
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Sales tax equals sales tax? - Sales tax Definition and differentiation sales tax Value added tax

Before we start making bookings, we first need to understand what exactly sales tax is. The sales tax definition is that sales tax taxes the value added of a good or a service, i.e. the newly created value in the respective service level. Sales tax is an indirect tax as it is not levied directly from the consumer but via the company. The terms sales tax and sales tax are often used synonymously for each other. However, the correct term for tax law is sales tax, even if the term sales tax is often found on receipts etc.

The concept of value added tax is derived from the way the value added tax is levied. The sales tax is calculated according to the principle of value added. This is called the all-phase system, because every turnover is taxed at every economic level.

Input tax and sales tax - input tax definition

Basically: The sales tax is levied on economic transactions. The typical three performance levels are: primary production, further processing using capital and, finally, trading. In total, only sales tax is paid on the consumer price. The reason is that entrepreneurs can offset the sales tax that is charged on their purchase with the sales tax that they in turn have to levy on their products.

This is why this sales tax is also called input tax here, because companies get back the sales tax they paid for their purchases. So that's the pre-tax definition. The end user ultimately bears the entire tax burden.

In Germany, the normal sales tax rate is 19 percent. Certain services are taxed at the reduced tax rate of 7 percent, e.g. groceries or books, others are exempt from sales tax.

Input tax VAT - 1st stage input tax deduction

But you still can't imagine anything under sales tax and input tax? Don't worry, a sales tax example will make it clearer! Take a company that mines silver. That is the first stage - the primordial generation. The company sells the silver to a factory for 100 euros net. You can now calculate the sales tax by multiplying the 19 percent by the 100 euros.

So the sales tax is 19 euros. The factory therefore has to pay 119 euros gross for the silver. The 19 euros difference to the net price therefore represents our effective sales tax, which the silver miner has to submit to the tax office. Since we are in the first stage here and the company has not made any purchases, there is no input tax.

Input tax VAT - 2nd stage input tax deduction

The factory is the second tier. She processes the silver into a wristwatch. This in turn is sold to retailers for 250 euros net. The sales tax is then 47.50 euros. The retail trade pays 297.50 euros gross for the watch.

Now we calculate the effective sales tax: The factory has received 47.50 euros in sales tax from the trade and paid 19 euros input tax to the silver mine, so it has to submit the difference between sales tax and input tax, i.e. 28.50 euros, to the tax office.

Input tax sales tax - 3rd stage input tax deduction

As a third and final stage, the retailer sells the watch to the end user for EUR 300 net plus EUR 57 sales tax, i.e. for EUR 357. You can calculate the effective sales tax by subtracting the 57 euros received sales tax from the 47.50 euros input tax paid. This difference results in an effective sales tax of EUR 9.50. The trade has to pay this amount of sales tax to the tax office.

In total, this economic process incurs an effective sales tax of 57 euros.

As you can see, this is exactly the amount that was incurred for the end user - so he pays the sales tax for the company, the factory and the trade.

Post sales tax input tax

Now let's focus on how sales tax and input tax are posted in a company. In our example, someone buys or sells goods in cash with a net value of 100 euros. As explained earlier, sales tax is input tax for you when your company purchases goods. The booking rate is therefore:

Because you pay 119 euros, but you get 19 euros back from the tax office. Once you have sold the goods, the whole thing looks a little different. The booking record is then:

You now have to pay 19 euros in sales tax from your proceeds to the tax office. The input tax is in the debit of the input tax account, while the sales tax is in the credit of the sales tax account. When you have booked all incidents, you can close the balance from the input tax account in the sales tax account.

Posting input tax sales tax - 2 cases

Two cases are now conceivable. In the first case the pre-tax balance is less than the sales tax. So the company has generally sold more than it bought. The pre-tax balance is therefore created on the debit side of the sales tax account. So you have a liability to the tax office, that is, you still owe the tax office money in the amount of the pre-tax balance. This is called a sales tax liability.

The second case is exactly the opposite: the sum of the input tax is greater than the sum of the sales tax. So, as a rule, more was bought than sold. In this case, the sales tax balance arises on the credit side of the sales tax account and is a claim against the tax office. So the tax office still owes you money! This case is also called a sales tax claim.

Depending on whether it is a sales tax claim or sales tax liability, this is posted at the end on the debit or credit side of the closing balance sheet account. Then you've already made it - you've accounted for sales tax!