Adjusting Sales Tax Payable by Sales Tax Item In QuickBooks

In this installment of Joe's Master Tips, we examine how to adjust Sales Tax Payable by Sales Tax Item in QuickBooks. There are two types of adjustments to Sales Tax Payable:

  1. Adjustments to Sales Tax Payable that show on the Sales Tax Return. Examples of this type of adjustment include (but are not limited to) reductions in Sales Tax Payable for timely filing discounts and increases in Sales Tax Payable for interest and penalties.
  2. Corrective adjustments to Sales Tax Payable that are the result of incorrectly recorded transactions.

If you are adjusting Sales Tax Payable for adjustments that show on the sales tax return, you can use a Journal Entry to debit or credit Sales Tax Payable. You can also use the Sales Tax Adjustment window. You will then apply this credit when you create the next Sales Tax Payment. There is no need to impact both Sales Tax Payable and the Sales Tax Item for this type of adjustment.

However, if you are making corrections to the balance in Sales Tax Payable because the balance is incorrect, and you need to adjust the balance to agree to the Sales Tax Return, it is best to adjust both Sales Tax Payable and the associated Sales Tax Items. 

Related Content:  See Avalara's 2016 Sales Tax Changes White Paper

Crediting Sales Tax Payable

To credit Sales Tax Payable, enter a Sales Receipt as described in the section titled, “Adjusting Income Accounts” of our article, Entering Adjusting Entries That Impact Items In QuickBooks- Part 1, and enter the Sales Tax Item(s) you need to adjust. Do not enter any Sales Items – just enter the Sales Tax Items. Zero the Sales Receipt to the Adjustment Clearing Account (using the Adjustment Clearing Item) and follow up with a Journal Entry to clear the balance in the clearing Account. Make sure to enter a line with the Journal Entries Item, with a 0.00 amount.

Debiting Sales Tax Payable

To debit Sales Tax Payable, enter a Credit Memo as shown below. Enter the detail on the Credit Memo just as you would do with the Sales Receipt as described in the section titled,“Adjusting Income Accounts” of our article, Entering Adjusting Entries That Impact Items In QuickBooks- Part 1. However, on the Credit Memo, positive amounts debit the General Ledger and negative amounts credit the General Ledger. Use the Adjustments Clearing Account and follow up with a Journal Entry to clear the balance in the clearing Account. Enter the Journal Entries Item with a zero amount.

In the example below, the client used a Check for $3,500 instead of a Sales Tax Payment to pay a sales tax in a previous sales tax month. The client posted the Check to an expense Account called “Sales Tax Expense.” So, the accountant needs to enter the following adjustment to the General Ledger – where the debit to Sales Tax Payable needs to affect two different Sales Tax Items.

Step 1. Enter a Credit Memo to debit the Sales Tax Payable account by Sales Tax Items. Zero the Credit Memo using the Adjustments Clearing Item.

Step 2. Save the Credit Memo. With the saved Credit Memo displayed, press CTRL+Y to create and print a Transaction Journal. Notice that the Credit Memo debits Sales Tax Payable to adjust for the overstatement and does so by multiple Sales Tax Items.

Step 3. Enter a Journal Entry to clear the balance in the Adjustment Clearing account as shown below.

The report below shows the combined impact of the two adjustments on the General Ledger. Notice there is no net impact on Accounts Receivable or the Adjustments Clearing account.

Next time, in the final installment of Joe's Master Tips, we will look at ways you can view a list of Adjustments when Adjusting by Both Account and Item.

Related Content:  See Avalara's 2016 Sales Tax Changes White Paper