Best practices for Recording of Taxes in Chart of Accounts


We’d like to understand and learn more on the tax accounting.

-We’d like to record a payment through payment entry, and if we select payment type - pay,
then we would need to select party type. What is the best suitable party type?
(Creating a new party type can only be done by the system wide Administrator, only when it opens a party type in list view, and then in upper right corner, actions > create new party type)

-Does the ERPNext automatically record journal entries under chart of accounts when we register a sale which has the sales tax at the bottom of the invoice, does that sales tax we collected gets debited under the current assets? As per many guidances, collecting sales tax should be recorder as credit in liabilities, and debit in assets, but does the ERP do that automatically?

-When time comes for remitting sales tax to state and government, how do we record a such payment in the accounting? I read that it can be alternatively achieved via a classic journal entry, and doesn’t that mean we need to create two entries to record those funds paid out from liabilities and then another one to reflect credit from current assets? What happens with the other master accounts, like 400 - Income or 500 - Expenses? Our government says that state sales taxes are not to be recognized as expenses.


Hello Denny,

In tax accounting, the choice of party type in the payment entry depends on the nature of the payment. If you are making a payment to a vendor or supplier, you can select the “Supplier” party type. If you are making a payment to a customer, you can select the “Customer” party type. If none of the available party types are suitable for your payment, you may need to create a new party type, which can only be done by the system-wide Administrator.

When you register a sale in ERPNext and include sales tax on the invoice, the system will automatically generate the necessary journal entries. The sales tax collected will be debited to a designated liability account, typically referred to as “Sales Tax Payable,” and credited to the relevant revenue account, such as “Sales Revenue.” This ensures that the sales tax collected is properly recorded as a liability and the revenue is recognized.

To record the payment of sales tax to the state or government, you can create a journal entry. Debit the “Sales Tax Payable” account to reduce the liability and credit the appropriate bank or cash account to reflect the payment made. This will appropriately record the funds paid out from liabilities and the reduction in current assets.

In terms of the master accounts, such as 400 - Income or 500 - Expenses, it is important to follow the specific guidelines and regulations set by your government. If your government specifies that state sales taxes should not be recognized as expenses, you can exclude them from the expense accounts. You can consult with a tax accountant or financial advisor to ensure compliance with your government’s regulations and appropriately configure your chart of accounts in ERPNext.

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