Question

Remitting sales tax (paying cash to the tax authorities), ______.

A) Decreases cash and increases liabilities
B) Decreases cash and decreases expenses
C) Increases cash and increases expenses
D) Increases cash and decreases liabilities

Answer 1

Remitting sales tax decreases cash and decreases liabilities because the sales tax is a liability that the business owes to the tax authorities and is paid out of the business's cash reserves. The correct option is a.

Step-by-step explanation:

The question you're asking is related to the accounting process involved in remitting sales tax. When a business remit sales tax, it is paying money owed to the tax authorities for sales tax collected from customers. The correct answer to your question is A) Decreases cash and increases liabilities. However, this is only a half-correct statement. More accurately, remitting sales tax would decrease cash and decrease liabilities. This is because the sales tax collected is not an expense but a liability since the money was collected on behalf of the government and does not belong to the business. When the business pays the tax authorities, it is clearing its liability of the sales tax payable and using its cash reserves to do so, hence decreasing both cash and liabilities simultaneously.