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How Should I Record Sales Tax in Split Transactions?

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Question: How Should I Record Sales Tax in Split Transactions?
"When I shop at a department store, or buy non-food items at the grocery store, I split the transaction into the appropriate categories. Is there a simple way to allocate sales tax across split transactions?"

The question of how to record sales tax in split transactions comes up frequently. Do you enter a lump sum into the sales tax category, divide sales tax by taxable subcategories, or do you just forget about sales tax altogether?

All About Spending Categories in Financial Software

Answer: The options for handling sales tax in split transactions is best explained by using an example: your state has no sales tax on food, and you go to Super Wal-Mart where you buy shampoo, pasta sauce, curtains, fishing lure, apples and school supplies.

To categorize your purchases, split the transaction and break out items by category. The pasta sauce and apples are grocery items and aren't taxable. Your options for handling taxable items in your financial software are:

  1. Track the true cost by category: multiply the total for each category by the sales tax percentage and enter that amount in the category. If your state sales tax is 6% and the school supplies total came to $22.59, apply $23.95 ([22.59 x .06] + 22.59) to the school supplies category.

  2. Use a sales tax category: record the price of items directly off the receipt and place sales tax in its own category. Record $22.59 in School Supplies and $1.36 (22.50 x .06) in Sales Tax.

  3. Estimate: Estimate sales tax on each category and add it to the cost of items under that category. This will most likely leave you with an uncategorized amount at the end which you will need to apply to expenses you choose. This does not give a true picture of your spending, but it works well enough for some.

  4. Forget about it: Don't bother categorizing sales tax and leave it as an uncategorized expense.

Quicken, Microsoft Money and other financial software packages come with a calculator feature built right into the account register, which helps if you decide to use a method that requires a little number crunching, such as method 1 or 2.

How you record sales tax in split transactions in your financial software depends entirely on how much detail you want in your budget and spending reports, and how much time you want to put into doing calculations. I suggest starting out by categorizing sales tax in its own category to speed up the data entry in split transactions and to avoid having a lot of uncategorized expenses on your reports. If you decide you want to track true costs later on, you can always start using the first method to add sales tax to your categorized expenses in split transactions.

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