Reconciling the Sales Tax Control Account Every Month

The sales tax accounts are balance sheet accounts, and in most companies at this size they are the only balance sheet accounts nobody reconciles monthly. They get opened once a year, when the practitioner asks for the filings, discovers that the ledger balance and the sum of the returns do not agree, and hands back a difference that is twelve months old and made of six unrelated things. Unpicking that costs days. Finding each of the six in the month it happened costs about twenty minutes.

So the position, stated before the walkthrough that argues it. Put the sales tax accounts in the reconciliation binder with the bank, the receivables and the payroll liabilities, and tie them out every month regardless of how often you file. A company on a quarterly reporting period still reconciles monthly, because the reconciliation is not a filing task. It is a balance sheet task that happens to feed a filing.

What this reconciliation does not do

It does not tell you whether a transaction was taxed correctly. Nothing in this piece does, and nothing in it should be read as though it did.

Whether a particular sale or purchase attracts tax, at what rate, in which jurisdiction, and whether your company is required to be registered anywhere it is currently not, are questions for the accountant who reports on your statements. They turn on facts about your entity, your customers and where you deliver, and getting them from an article is how companies end up with a consistent answer that is consistently wrong. Ask once, in writing, and write the answer into the file.

What the reconciliation does is narrower and entirely mechanical. It proves that the ledger, the system’s own tax records, the returns that were filed and the money that left the bank all say the same thing. Every one of those four can be right about tax law and still disagree with each other, and the disagreement is what this exercise finds.

The four corners

A sales tax reconciliation is four tie-outs rather than one, and companies that do any of it usually do only the first.

Corner	What it is	Where it comes from	What it proves on its own
1. The ledger	The balances in the tax accounts on the locked trial balance	Trial balance exported after the period lock	Nothing. It is the number being explained
2. The tax records	The system’s own tax detail report for the same dates	Accounting system, run on the same date range as the lock	What the system thinks the period produced, transaction by transaction
3. The returns	Every return filed for the periods that make up the balance, as filed	The saved copy of the return, not somebody’s recollection of it	What was actually reported
4. The money	Every remittance and refund that moved	Bank statement lines, matched to a return	What actually settled

Four corners, three ties.

Corner 1 to corner 2 is the tie everybody does. It catches transactions posted without a tax code and journals posted straight into a tax account.

Corner 2 to corner 3 is the tie almost nobody does. It catches the return that was prepared from a report run on the wrong dates, and the transactions that were posted into a period after the return for that period had already gone out. That second one is the largest recurring source of difference in this account and it is completely invisible from the ledger alone.

Corner 3 to corner 4 takes ninety seconds and is skipped more often than either of the others. It catches a return filed at one figure and paid at another, which is a keying error rather than a tax question, which nobody notices for a year, and which leaves an amount sitting in the account that no amount of staring at the ledger will explain. Do this one first if you only ever do one.

One month, walked

The company below is illustrative and so is every figure in it. It reports quarterly, and the month being reconciled is the third month of a reporting period, which is the awkward one because it carries two months of accumulation plus whatever the previous period left behind.

Opening balances on the first of the month:

Account	Balance	What it represents
Tax collected on sales	137,410 credit	Two months of the open reporting period
Tax recoverable on purchases	52,065 debit	The same two months
Prior period return payable	68,400 credit	A return already filed and not yet remitted

Net liability carried into the month, 153,745.

The month’s movement:

Movement	Amount
Tax collected on sales, this month	71,880
Tax recoverable on purchases, this month	24,315
Remittance of the prior period return	68,400 out

Work the expectation forward before opening the ledger. This ordering matters and people reverse it. Collected becomes 209,290. Recoverable becomes 76,380. The prior period payable clears to nil. The net expected balance is 132,910.

The ledger says 133,345. The difference is 435.

A 435 difference on a balance of that size is exactly the sort of number that gets waved through, and waving it through is how the annual version becomes unreconcilable. It is three items, and they have three different answers.

The difference log

Amount	What it is	How it was found	What happens to it
260	A manual journal posted straight to the tax collected account with no tax code on it	It is in the ledger and absent from the tax detail report, which is the definition of the corner 1 to corner 2 gap	Reversed. Then somebody has to deal with whatever it was posted to hide
145	Tax on a sales invoice posted this month but dated into the previous reporting period, whose return was already filed	Corner 2 to corner 3. The detail report for the filed period now shows more than the return did	Left in place, named on the schedule, and the question of how a late-dated document is handled goes to the accountant once and gets applied the same way every time
30	The prior period return was filed slightly below the detail report figure for that period, and the remittance cleared the filed amount	Corner 3 to corner 4	Carried as a named standing item and cleared once a year with the accountant’s agreement, not absorbed silently

Unexplained residual after the log: nil. That is the only acceptable closing state. A reconciliation is finished when the difference is explained, not when it is small.

The 260 deserves a paragraph on its own, because it is the item to look for first on any file you have not seen before. A journal entry posted into a tax account with no tax code attached is either a mistake or a plug. There is no third category. Somebody hit a difference they could not explain, made it go away with a journal, and the account has been carrying a lie ever since that grows every time it is repeated. Pull the general ledger detail for both tax accounts and read every manual entry in it. On a file that has never been reconciled monthly, this single step usually accounts for most of the annual difference, and it takes an afternoon.

The 145 is the opposite case and it is important not to treat it as an error. Nothing was posted wrong. A document arrived late, it belongs to the period it is dated in, that period is closed and filed, and the ledger is now correct while the return for that period is not current. The mechanical answer is to name it and carry it. The treatment question, meaning what should actually be done about a filed return that no longer matches the records behind it, is not yours to settle. Route it, get one answer, and apply that answer every time it recurs, because it will recur every quarter.

The schedule you keep

One tab per reporting period, one row per month, and the same columns forever.

Column	Why it is there
Period and month	So the schedule sorts and so a filed period is visibly closed
Opening balance, by account	The tie to last month’s closing, which is what makes the schedule a rollforward rather than twelve unrelated calculations
Tax collected in the month, per the detail report	Corner 2, on the collected side
Tax recoverable in the month, per the detail report	Corner 2, on the recoverable side
Remittances and refunds settled in the month	Corner 4
Expected closing balance	Arithmetic, not opinion
Ledger closing balance	Corner 1, from the locked trial balance
Difference	Should be nil after the log
The difference log itself, itemised	Each item with an amount, a cause, an owner and a status
Filed or open	So that nobody prepares a return from a period that is still moving

The rollforward is the part that does the work. A schedule where each month opens with last month’s close cannot hide a difference for more than one period, because the difference has to be carried forward explicitly and it sits there with a date against it getting older in front of somebody. A schedule rebuilt from scratch every quarter can hide one indefinitely.

Two further habits. Save the tax detail report as a file into the month’s binder rather than relying on being able to re-run it, because a report re-run six months later against a ledger that has moved will not reproduce. And save the return as filed and the bank line that paid it in the same folder, so the three-tie exercise next year is a matter of opening one directory.

Where this sits in the close

It is a reconciliation, so it belongs in the reconciliation block of the close, prepared from the post-lock export like everything else there, with its evidence in the binder. See the monthly close for where that block sits and what the lock protects. Nothing about this account justifies a separate process, and giving it one is how it drifts out of the close and back to being an annual event.

One control point is worth naming even in a company of three finance people, and it belongs with the rest of the segregation work. Where there are two people, the person who prepares the return should not be the person who releases the payment for it. Suspicion has nothing to do with it. Corner 3 to corner 4 is the tie nobody performs, and splitting those two acts across two people performs it for free, because the person releasing has to look at the filed figure to know what to pay.

What we do not do

We do not decide whether something is taxable, in which jurisdiction, or at what rate. That question leaves the building and comes back in writing before it goes into a return.

We do not prepare a return from an unlocked period, because a return prepared from a moving trial balance cannot be tied to anything afterwards, including itself.

We do not clear an unexplained difference with a journal, at any size. If it is genuinely too small to chase, it gets named as a standing item with a date on it and cleared deliberately, once, with the accountant’s agreement. The distinction between a difference that has been accepted and a difference that has been hidden is the whole reason this account is worth reconciling at all.