Tax on purchases
Objective: Treat purchase tax according to the stated rule.
Recommended first: Sales tax basics
In many sales-tax systems, tax a business pays on items for its own use is part of the item's cost. In VAT systems, registered businesses can often reclaim input tax. Exercises state which rule applies.
Whether tax on purchases can be reclaimed depends on the tax system and the business's registration status. Where it cannot be reclaimed, the tax is simply part of what the item cost. Where it can, it is recorded separately and offsets tax collected. Exercises always state which rule applies — never assume.
Treating non-recoverable tax as part of cost means it follows the item: tax on supplies becomes part of Supplies, and tax on equipment becomes part of the equipment's depreciable cost.
Check your work
- Is purchase tax recoverable under the stated rule?
- If not, is it included in the item's cost?
- If so, is it recorded separately?
Supplies $200 + $12 tax, not recoverable: record $212 as Supplies.
| Account | Debit | Credit |
|---|---|---|
| Supplies | $212.00 | |
| Cash | $212.00 |
Common mistakes
✗ Debiting Sales Tax Payable for tax on purchases in a sales-tax system.
✓ Follow the stated rule; here it is part of cost.
Guided practice
Use hints freely here.
Item 1 of 1
Sales tax paid on a purchase
On Mar 9, 2026, Corner Bean Café buys cleaning supplies for its own use for $610.00 plus $36.60 sales tax, paid by card. In this fictional jurisdiction, tax on items a business uses itself is not recoverable and is part of the cost.
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Independent practice
Try these without hints. Completing the lesson needs at least one independent item solved without revealing the answer.
Item 1 of 2
VAT payable for the period
In the fictional country of Norland, VAT is 20%. A business made taxable sales of $16,800.00 (excluding VAT) and taxable purchases of $4,900.00 (excluding VAT). Compute output VAT, input VAT, and the net VAT payable.
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References and provenance
- OpenStax, Principles of Accounting, Volume 1: Financial Accounting (accessed 2026-10-29)
Original lesson written for Bookkeeping Exercises (AI-assisted drafting). Calculations are verified by the platform's automated accounting tests. Not yet reviewed by a credentialed accountant. Updated 2026-10-29.