Most states in the US allow businesses to keep some of the collected sales tax if the quarterly payments are made early or on time - the Timely Discount. In my case, I receive a 1.2 percent discount on the first $6,000 collected and 0.9 percent for the amount above $6,000.
If Manager shows a $100 Tax payable Liability and I pay it on time through a cash account, I’m left with $1.2 liability that I don’t actually owe. What would be the proper way to clear that amount? Thanks.
Use a journal entry:
Debit: Tax payable
Credit: Miscellaneous income (or some other income account you choose or create)
Here is the reasoning: you charged the customer $100 and applied a tax code for, say, 6% sales tax. You received $106 from the customer, posting $100 to a sales income account and $6 to Tax payable. The amount in Tax payable is being held in trust (in your bank account) for the tax authority. By extending you a timely payment discount, the tax authority has effectively become your customer by forgiving part of the debt you owe them for tax you collected on their behalf. (The IRS considers forgiven debts as income.) The 1.2% discount has to go somewhere, because you are no longer holding it in trust. So you now have $0.072 additional income.
Another way to think of it, forgetting all the transactions that really occurred, is that you charged the customer $100.072 and applied a tax rate of 5.924% (with a little bit of rounding error).
Alternatively, when you do the Spend Money to pay the tax add an extra line.
The first line is Account Tax Payable for 100
The second line is Account Misc Income for -1.20 (note the minus)
Spend Money Nett total is 98.80
Now everything to do with that payment is within the one transaction.
@Brucanna’s way is definitely less work if you know the discount amount at the time you pay. My approach resolves the leftover amount if you’ve already paid.