When you use the advanced method of Profit First you will have at least five and probably more bank accounts. One of these accounts used by retailers is a sales tax account. Retailers collect sales tax on merchandise sold in 45 states. And in 38 states are there are also local sales taxes. When you as a retailer collect sales tax, that money is not yours. It bellows to the state or local government and you are simply acting as their agent. The Profit First sales tax account is specifically for keeping track of sales taxes collected and keeping the money safe until it is time to pass the money on the appropriate government entity.
The first thing a retailer using Profit First will do is set up a checking account, the sales tax account. The advanced section of the Profit First book covers this. The funds for the sales tax account are allocated from Total Income and are considered a Real Revenue amount. In addition, owner’s pay, profit, operating expenses, and tax would also come from Real Revenue.
This is one Profit First banking category for which you will not need to decide what amount to deposit in the account. All sales taxes collected will go into the sales tax account.
How this money is treated in your bookkeeping is also important. In bookkeeping the so-called “top line” amount is Total Income. But, Profit First also uses a concept called Real Revenue to help business owners better appreciate the true size of their business.
There are businesses where a lot of money comes and goes but not all it is indicative of a profit. The common example is a construction business where subcontractors do, and are paid for, much of the work and where materials are purchased by the contractor as part of the building project. When these amounts are significant it allows the Total Income amount to seem very substantial indicating a business that is larger than the person really has. Thus a contractor will use Real Revenue in which subcontractor pay and materials are subtracted from Total Income in order to produce a number more in line with the size and scope of the business. This bookkeeping effect can also be seen in retailing so your Profit First Professional may put sales tax into the Real Revenue category as well.
How the sales tax will be handled in your Profit First bookkeeping in QuickBooks will be a matter for your Profit First Professional to decide. But, first and foremost, you must create your sales tax checking account to sequester all sales tax until you pass in on to the appropriate government entity. The important part for running your business will be for your QuickBooks custom reports to properly reflect the sales tax in your overall financial picture.
If you still have questions or are interested in implementing Profit First in your business, visit our website, ExigoBusiness.com, or contact us at (816) 394-6818.
Click here to watch the YouTube video about the sale tax account.