why sales tax they are dividing 20/120 and purchase 20/100 to get the percentage? Why 120?

why sales tax they are dividing 20/120 and purchase 20/100 to get the percentage? Why 120?

D Co’s transactions for the month of September 2015 were as follows:
\$
Sales (including sales tax) 600,000
Purchases (excluding sales tax) 450,000
D Co is registered for sales tax at 20%. On 1 September 2015 the sales tax account showed sales tax
recoverable by D Co of £2,000.
What was the balance on the sales tax account on 30 September 2015.
A \$8,000 Dr
B \$8,000 Cr
C \$12,000 Dr
D \$12,000 Cr

Sales Tax T Account

Balance b/f (the recoverable sales tax) \$2000
Purchases (450,000 x 20/100) \$90000
Balance c/f \$8000

Sales (600,000 x 20/120) \$100,000
Balance b/f 8,000
The correct answer to this question is therefore B: \$8,000 Cr.

May 4th 2016

Sales is INCLUSIVE of tax, for that reason it is divided by 120 and not by 100

Let me explain, say, you go buy a shirt for \$100 and you're told the shirt is inclusive of a tax of 20% but you're unaware of the real price of the shirt due to the tax inclusion.
That means we can safely say that 100% is the unknown price of the shirt let's call that price X and an added 20% included in the price is the sales tax. So as for now, the shirt is at 120%

Hence 120% : \$100
Therefore 100% : \$X

meaning 120% is a representative of the shirt costing \$100 (which has a 20% tax) but 100% as in the real price of the shirt is unknown ie: X

So use ratios. X= (100% × \$100) ÷ (120%)
Therefore. X= 83.33

The price of the shirt EXCLUSIVE of sales tax is \$83.33
And the price of the shirt INCLUSIVE of sales tax is \$100
Therefore the tax amount is \$100 - \$83.33 = \$16.67

As for the Question above, sales is inclusive of 20% tax hence 20/120. 120 (100% being the amount without tax plus a 20% tax charge) so you're looking for the tax charge ÷ total charge including tax.

As for purchases its exclusive of tax but you know that tax is 20% so look for 20% ie 20/100 of the price and add it to the price of the purchases to actually make it 120%