Knowledgebase

April 2010's Trick of the Trade

Question

Every day, members of the Sleeter Group Consultants Network tackle the day-to-day problems of their clients in the real world. The following is an example problem and solution that surfaced this month on our Sleeter Group Consultants Network Expert Forum.

Question: My client’s accountant is questioning a negative sales tax payable balance on their cash basis balance sheet. Accountant instructed us to set up sales tax on an accrual basis. I don’t have many clients using the sales tax module in QB so I haven’t come across this before. I checked and data is correct with accrual based BS reflecting correct numbers. Is this okay, or am I missing something? The accountant is filing taxes on a cash basis. Should he have instructed them to set up ST on cash basis as well?

Answer

Kim Petro McCrum answered: Depends on State Law. In New York State Sales Tax must be calculated on accrual basis for everyone.

Stuart McClain replied: It depends on your state. California requires sales tax paid on Accrual basis regardless of income tax reporting.

Jeanne Tarazevits sent from her Blackberry: Check and see if they entered a bill for sales tax. Also could be prepayments.

Finally, Wendy Swedean stated: If you have a cash basis balance sheet while on the accrual basis for sales tax reporting, it is possible (even likely) to have a negative sales tax payable balance. On the cash basis balance sheet, sales tax payable isn’t credited until the invoice is paid. On the accrual basis sales tax, you are debiting the sales tax payable when you pay the tax-on all invoices through the end of the reporting period. You probably have not yet received payment on all of these invoices, so the balance is a debit. As payments are received (or written off), the account will balance itself out. Many companies don’t notice that this is happening because of the lag in time between the end of the sales tax reporting period and the day the sales tax is paid.