"Double Dating" transactions?

[David Harrison]

----- Original Message -----
From: Aaron Gaudio <prothonotar at tarnation.dyndns.org>
Date: Thursday, September 2, 2004 5:14 am
Subject: Re: "Double Dating" transactions?

> On Wed, 2004-09-01 at 22:39 -0700, David Harrison wrote:
> 
> > This sounds like your talking about income tax deducted from 
> your paycheque. 
> > If this is the case, I would still accumulate the monthly 
> payments in the 
> > income tax payable account the same as in the example I posted 
> earlier.  The 
> > payable account is really a receivable, but it's one of those 
> accounts that 
> > can "flip" back and forth on the balance sheet..
> 
> I disagree here. An Accounts Payable is a liability account 
> representingmoney that you have but which you owe. When you pay a 
> tax withdrawal
> from your paycheck, it is not money you have- the IRS has it.
> Furthermore, that withdrawal will include Social Security, Medicare,
> State and Federal taxes, all which should go to seperate tax expense
> accounts (not payable accounts). Amounts you overpay should go to an
> Accounts Receivable, since this represents money which you don't have
> but which is owed to you. I'm not sure the accountant way to correctly
> retroactively calculate each payment's portion that goes to the 
> AccountsReceivable (e.g. can you just divide your refund evenly 
> across the
> months? this is probably not bad, but not completely accurate if the
> withdrawal amounts change due to increased income or changes to 
> tax law
> in the middle of the year). 
> 
> > 
> > If you are posting to the expense account to reflect the cash 
> outflow, you 
> > are treating the income statement as more of a cash flow statement.
> 
> I don't understand this. Are you saying he should not transfer his 
> taxespaid to a tax expense account? That's not right- he should 
> transfer the
> taxes paid from his income to his tax expense accounts (or from income
> to accounts payable *IF* taxes are not withdrawn from your 
> paycheck-
> e.g. you're self-employed and have to submit quarterly tax payments).
> 
> > My entries would cause the expense to be recorded in 2003, and 
> the refund 
> > being recorded in 2004.  The balances would be as follows
> > 
> > Dec 31, 2003
> > Bank would show $1,000.00 paid
> > Income taxes payable $ 100.00 (debit balance) - technically a 
> receivable
> This should be in an "Accounts Receivable" type account. But it's not
> "income taxes payable" (payable means you owe the money), it's "income
> tax refund" (or "receivable"- meaning they owe you).
> 
> > Income tax expense    $ 900.00 (debit balance)
> 
> And this should be an "Expense" type account. If you don't pay 
> your tax
> to the gov't immediately, then you should have a seperate "Income 
> TaxesOwed" (or "Payable") account of type "Account Payable" which 
> would be a
> liability.
> 
> > 
> > May 15, 2004
> > Bank would show $100.00 received
> > Income taxes payable $ 0.00
> 
> Important to note that you would transfer the $100 from the
> (inappropriately named) "Income taxes payable" account, as soon as 
> yourrefund check is deposited into your account.
> 
> > Income tax expense    $ 0.00 (as the balance would have closed 
> to retained 
> > earnings)
> 
> This is wrong- you wouldn't want to empty your expense account. You've
> still paid your taxes from the previous year, and since gnucash shows
> the lifetime amount, I would expect to still see $900 (plus any prior
> years' expenses); unless you have closed your books and started a new
> registry, which gnucash does not support yet.
> 
> -- 
> Aaron Gaudio <prothonotar at tarnation.dyndns.org>
> 
To be honest, I wasn't trying to get into an arguement about this, my goal was to help. This is a very difficult subject, with many different possible scenarios. And, sorry in advance for the long post.

Income taxes withheld from a paycheck, or submitted as installments are not a true expense.  They are a prepaid expense, which is an asset and should appear on the balance sheet, not the income statement.  The expense is normally recorded at the end of the year, when the expense is known (the calculation is made after the year end, but entered dated for the last day of the year.)

I realize that the income tax payable account in a debit balance is really a receivable, and the name is a misleading - but don't get too hung up on the name.  Rather than trying to move things back and forth from payable to receivable, it is normal to post things to a payable account and have it show a debit balance.  Other accounts that behave the same way for businesses are (in Canada) GST payable, payroll taxes, shareholders loan, and others.  Accountants use file prep programs, such as CaseWare, that recognise when these accounts are in a debit balance, and reclassify them to current assets  on the financial statements (and they also rename them to receivable).  But the convention is to post them to the payable account (I know that there are situations where this isn't the case, but I am trying to simplify and not deal with the exceptions).  

If you were following GAAP, the entries that I proposed in my original posting would be correct. The only time the expense is recorded is at the end of the year, when you know exact amount of the expense. The montly payments would be "held" on the balance sheet until then.  If you are not required to follow GAAP, then you can record it however you want.  The end goal is to produce a statement that is useful to the user of the financial statement.

My comment regarding the cash flow statement was only in regards to my thinking that maybe he wanted to record the income tax withholdings as an expense so he could see what his cash outflow was (I hope this sentence makes sense).  The function of the income statement is not to show cash flow, it is to match expenses to revenues (matching is one of the conventions of accounting).  The function of the cash flow statement is to show the flow of cash in and out of the entity - big difference.

My reference to the expense account being zero for 2004 is obviously in error.  I have not yet done a full year in GNUCash, and didn't realize that it doesn't yet properly close the books.  The point, though, is that if you look at the current year (2004) expense in isolation, it would not reflect the prior year (2003) income tax expense.

I hope I haven't muddied the water any more than it already is ;)  If it helps, I know it does for me, get a peice of paper and draw some T-accounts and visualize how the transactions flow through the accounts.  (Quick lesson on T-accounts - draw a T; put the name of the account above the T; write your debits on the left side of the base of the T and the credits on the right).

If any of this doesn't make sense, please ask me to clarify.  Sometimes when you do something for a living, it's harder to explain to those who don't.  Again, I appologize for the long post.

David