Sales contract for trailer purchase with trade-in and sales tax

To handle a trade-in on a sales invoice where the customer trades in an item (like a trailer) to reduce the price of a new purchase, we recommend using a Service item to represent the trade-in allowance. This method adjusts the taxable amount correctly and records the value of the trade-in into a holding account.

Step 1: Create a clearing account

First, set up a “Bank” type account to hold the value of the trade-in temporarily. This is often called a “Trade-in Clearing” account.

1. Go to the Settings (gear icon) and select Chart of Accounts.
2. Select New.
3. Under Account Type, choose Bank.
4. Under Detail Type, choose Cash on hand.
5. Name the account (e.g., “Trade-in Clearing”).
6. Select Save and close.

Step 2: Create a Service item for the trade-in

Create a specific item to use on the invoice for the trade-in value.

1. Go to the Settings (gear icon) and select Products and Services.
2. Select New, then choose Service.
3. Name the item (e.g., “Trade-In Allowance”).
4. In the Income account field, select the Trade-in Clearing account you created in Step 1.
5. Select Save and close.

Step 3: Create the invoice

Create the invoice for the new item and apply the trade-in.

1. Select the + New button and choose Invoice.
2. Line 1: Enter the new item (e.g., the new trailer) being sold. Enter the Quantity and Price. Ensure the Tax column is checked if this item is taxable.
3. Line 2: Enter the Trade-In Allowance service item.
   • In the Quantity field, enter -1.
   • In the Rate field, enter the agreed trade-in value.
   • Tax handling: Most states only charge sales tax on the difference between the new sale price and the trade-in value. If that applies to you, check the Tax box for this line. This subtracts the trade-in value from the taxable subtotal. If your state taxes the full gross price before the trade-in, leave the tax box unchecked.
4. The total will reflect the balance due from the customer. Select Save and close.

Step 4: Add the trade-in to inventory (Optional)

If you plan to resell the traded-in item and need to track it as inventory, you must move the value from the clearing account to your Inventory Asset account.

1. Go to the Settings (gear icon) and select Products and Services.
2. Create a new Inventory Part item for the used trailer.
   • Set the Initial quantity on hand to 0.
   • Select Save and close.
3. Select the + New button and choose Journal entry (or Check if you prefer).
4. Line 1: Debit the Inventory Asset account (associated with your new inventory item) for the trade-in value.
5. Line 2: Credit the Trade-in Clearing account for the same amount.
6. Save the transaction.

This records the used trailer in your inventory with the correct value and zeroes out the clearing account.