"Double Dating" transactions?

Aaron Gaudio prothonotar at tarnation.dyndns.org
Thu Sep 2 14:45:45 EDT 2004


On Thu, 2004-09-02 at 09:36 -0700, David Harrison wrote:
> 

> 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.
> 

No arguments from me, except for a civil exchange of ideas. BTW, your
email software does not appear to be wrapping your text.

> 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.)
> 

IANAA, but I disagree. I believe (in the US, at least) taxes are owed
periodically, not at the end of the year. If you are self employed and
responsible for paying all of your own taxes (that is, no withdrawal
from your pay check), you *have* to pay quarterly- if you don't a
penalty is assessed against you. Now, if it turns out you owed more than
you paid, yes the difference will be due April 15 of the following year
(unless you file for an extension). But IMO this should be treated the
same as if you are owed a refund- that is, on an accrual basis.

IMO, taxes would only count as a prepaid expense if you actually pre-
paid your taxes. For instance, (in the US at least) you can elect to
have one year's refund held by the IRS to pre-pay the next year's taxes.
In this case, you could count the un-recovered refund as a pre-paid
expense, then transfer it into a real expense account once the tax is
actually due (next quarter, month, etc.).


> 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.
> 

Agreed about the end goal, but I'm not sure about the "only time the
expense is recorded is at the end of the year". Maybe this is a
difference between countries. However, to not count tax expenses until
the end of the year seems like it would skew your financial reports (say
you produced quarterly statements- your tax payments would show up as
assets on your balance sheet with no tax liability to counterbalance it-
making it look like you have a greater book value than you actually
do). 

> 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.
> 

Agreed, but if a tax is an expense when paid, it ought to affect your
income statement. This is why there is a such thing as "Income before
Taxes" entry in an income statement, and why tax expense is shown on
public corporation's income statement after it. See
http://finance.yahoo.com/q/is?s=MSFT for an example.

> 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.
> 

Yep, hopefully Gnucash will have book closing soon. Some reports take a
long time to generate when you have a few years' data. That's a subject
for another topic though. 

> 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


More information about the gnucash-user mailing list