How to Account for Sales, Property & Income Taxes

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  • 0:02 Taxes
  • 0:43 Sales Taxes
  • 1:50 Income Taxes
  • 3:15 Property Taxes
  • 4:17 Lesson Summary
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Lesson Transcript
Instructor: Natalie Boyd

Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.

Taxes are a certainty, for businesses as well as for individuals. In this lesson, we'll examine accounting principles for three common taxes that businesses encounter: sales tax, property tax, and income tax.


They say the only things that are guaranteed in life are death and taxes. Leslie knows that - she owns her own business, a small flower shop, and it seems like she's always paying taxes! Taxes are a required payment to the government. Individuals, like Leslie or you or me, have to pay certain taxes every year, but so do businesses like Leslie's flower shop. The taxes a business pays partly depends on where it is located and partly depends on what type of business it is. Let's look at how Leslie can account for three common taxes businesses face: sales tax, income tax, and property tax.

Sales Taxes

Have you ever gone to the store to buy something that was $20, but when the clerk rang it up, it was more than that, like $21.50? The extra money that you had to pay was a sales tax, or a tax levied by the government on things that are purchased. In the United States, sales taxes vary from state to state, but the business is always responsible for collecting sales tax and passing it on to the government.

In Leslie's state, the sales tax is 7% on every purchase. So, let's say that a man comes in to the store and buys $100 worth of flowers for his girlfriend. He would actually have to pay $107: $100 for the flowers and $7 in sales tax. That's pretty simple from his point of view. But, how does Leslie record the sales tax? In her books, Leslie will want to record $100 as a sale and then $7 as a liability. In this case, Leslie will be a holding agent for the state, and when she collects that $7 in sales taxes, it creates a liability (something she owes) to the state government.

Income Taxes

Every April, Leslie gets stressed out because she has to fill out her tax form and pay her taxes. Just like you and me, Leslie's business owes income tax, or a tax levied by the government on the money earned in the previous year. Depending on what type of business it is, income tax varies, but most businesses (including Leslie's) owe income tax to the federal government, the state government, and sometimes to the municipal (or city) government. That's a lot of tax!

Taxes for businesses are slightly different from taxes for employees. An employee has a certain amount withheld from their paycheck every time they get paid, which then goes to the government, but businesses have to file estimated taxes, or taxes paid during the year that are an estimate of the total tax bill for the year. Estimated taxes have to be paid four times a year.

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