Tax A/R - (Liability) and Tax A/P (Assets)

Question

Hi I am confused with Tax A/R and Tax A/P
Tax A/R (when you raise the sales order you collect it from the customer) will be posting to a G/L account in Liability cabinet eventhough it is an income to you,
and
Tax A/P (when you raise a purchase order you have to pay to the vendor) will be posting to a G/L account in Assets cabinet even though you have to pay it to the vendor. What is the logic behind these tax G/L accounts taken into different cabinets in the Chart of Accounts.  Is there any one who can share their views on it.
thanks
Venkat
Edited by: Venkat on Mar 18, 2008 12:58 PM

Answer 1

Hi Venkat
It is very simple logic.
You have to pay taxes to the government for all item you sale and you collect it from customer behalf of govt. so that is your liability to govt. means what ever tax you will collect from customer through sale, you have to pay to government, so it is liability.
And on purchase you are the customer, you are paying tax to your vendor on his sale, that means you alredy paid the tax on item.
for example
You purchase item A for Rs. 100 and tax on that is Rs. 10, your total purchase cost is 110.
in this transaction Rs. 100 is your Inventory cost and 10 is tax amount which you paid to vendor and vendor will pay it to govt.
Now you sale that item A for Rs. 200 and you charge tax of Rs. 20 to your customer.
Your total sale value is 220. now Rs. 20 is your libility to pay govt. as tax which you have collected from customer but at the time of purchase you had already pay Rs. 10 tax to the govt. which is accounted in your asset, so you will pay only 20-10 = Rs.10 to govt.
regards
kamlesh