Which accounts should be used when adding sales tax, freight, or any other noninventory expenditure on a purchase order? I am the buyer for a construction company. I believe taxes should go to an overhead account, but I'm not sure what to call it.
The sales tax you pay for inventory used in manufacturing or construction is a cost of goods sold. The inventory you purchase is also a cost of goods sold; however, the sales tax expense for the inventory is an overhead expense, which ultimately is figured into your total cost of goods sold. It is important to distinguish your direct overhead expenses when calculating your cost of goods sold, or your inventory will have an overstated value that could have adverse effects on your profits. Use the accounting rule of debits and credits to account for the sales tax paid on your inventory.
- Separate your inventory cost from the total price on your inventory invoice. The inventory cost includes the costs for the items you purchased without consideration of taxes, shipping, or delivery. Your inventory cost is also referred to as the list price.
- Determine the sales tax you paid for the inventory. In general, the sales tax is listed at the bottom of your invoice.
- Debit your inventory account with the amount of your inventory cost. Entering the amount as a debit or negative figure results in an increase to the book value of your inventory.
- Debit your overhead expense account with the amount of the sales tax paid.
- Credit your cash account in the amount of your inventory cost and sales tax paid. Issuing a credit to the book balance of your cash accounts reflects a decrease in the cash account and represents the money you spent to pay for the inventory and sales tax. After the debits and credit have been accounted for, the transactions balance on your company’s balance sheet.
You can also do the same exercise for freight costs.
This will help you track the actual cost of merchandise separately from the sales tax and freight charges, which can both be considered.
Answered by: Paul S. Carpenter, CPA, is president of Carpenter Capital Advisors in Johnstown, Pa.