Accounting question

[DaveC49]

Hi Dean,

A liability is just an expected future expense or call on your assets that
you are obligated to pay. As you generally know what tax bracket you fall
in, it is at least usually possible to estimate reasonably closely your tax
liability as it accumulates rather than just at the EOFY. In practice most
tax authorities have pay as you go schemes which in effect are doing this
for you ( and earning them investment funds). It is a common accounting
practice to estimate liabilities which accrue over a period but are not due
until some future time as it allows you to set aside funds or at least be
aware of the future cash flow needs rather than getting a huge surprise when
the tax bill comes in. 

Obviously recording the prepayments as an asset works equally as well as far
as recording the actual transactions and the end result works out the same.
My reason for using a liability account is just that the prepayments are no
longer in your control and you are not receiving any direct economic benefit
from holding them as an asset, as any income earned by them accumulates to
the government not to you. 

In the case where the tax office doesn't collect the payments as you earn
them, but you accumulate funds in a bank account to meet that future
liability, then the case for using an asset account is much clearer in
accounting terms. 

In the end as long as whatever approach you use allows you to be able to
predict and meet your future cash needs, then it has met your objectives in
keeping financial records.
Cheers

David



--
View this message in context: http://gnucash.1415818.n4.nabble.com/Accounting-question-tp4685499p4685515.html
Sent from the GnuCash - User mailing list archive at Nabble.com.