Money that passes through

Three September entries move money that isn't Northwind's to keep. Each teaches the same habit: ask whose money it is before you decide what it is. JE-5's walk-in customer handed over $10,260, but only the $9,500 price is revenue. The other $760 is sales tax, charged on the state's behalf. It's credited to sales tax payableTaxSales tax payableSales tax charged to customers and not yet remitted to the state — a liability from the moment it is collected, never revenue, when the entity has elected to exclude such taxes from the transaction price, a liability that stays on the books until the return is filed and paid. The trade customer on JE-7 paid no tax, because it buys to resell and gave Northwind a resale certificateTaxExemption certificateThe document a buyer gives a seller to claim a sales tax exemption — resale, manufacturing, an exempt organization — which the seller keeps to prove why it did not collect. New Mexico's version is the nontaxable transaction certificate (NTTC).

Strictly, keeping sales tax out of revenue is a policy election, not a rule. ASC 606 lets a seller exclude all taxes of this kind from the transaction priceRevenue recognitionTransaction priceThe consideration an entity expects to be entitled to for the contract, including estimated variable consideration and excluding amounts collected for third parties such as sales tax at once, instead of deciding tax by tax whether it collected the money for someone else. Nearly every seller makes the election, and so does Northwind.

JE-11 is the same idea inside a payroll. Northwind's staff earned $8,400, and that gross figure is the expense. Only $6,707.40 reached their bank accounts. The other $1,692.60 is their federal income tax and their share of Social Security and Medicare, withheld from their pay and owed to the Treasury. That's a payroll liabilityPayablesPayroll liabilitiesWhat an employer owes on wages it has already paid — the income tax and the employees' share of Social Security and Medicare withheld from their pay, plus the employer's own payroll taxes — until it is deposited with the government. The withheld part was never the employer's money: IRS Pub. 15 calls it trust fund taxes, and tax law is explicit that the money was never the employer's. Writing the entry as expense, liability and cash is bookkeeping mechanics. The obligation underneath is tax law. Northwind's own share of payroll taxes, which is its expense, waits for month end in lesson 9.

JE-14 is money that belongs to the owners. On September 30 the board declares a $500 dividendEquity & financingDividendA distribution of earnings to shareholders, declared by the board — a liability from the declaration date and a reduction of retained earnings, never an expense, to be paid in October. Declaring it creates the obligation, so the liability is recorded that day. The debit goes to a separate dividends account, the usual mechanics, which is closed into retained earnings at year end. For the reason in lesson 2, it never reaches the income statement.

Every payroll figure here comes from Northwind's September run. The Payroll trackTrackPayrollGross to net, the employer's taxes, deposits and filings, and how a payroll posts to the books.8 lessons · 99 min works the same payroll from gross to net, and the deposits and returns that settle the liability.