[GNC] How to record Personal income tax ?

[doncram]

Long, Michael, David, Adrien --
I think the question was a good one, and that it has been answered, despite
Long's last post suggesting it was not answered.   The brief version of
answer:  if you want to use your accounting system to recognize your tax
liability at the same time you recognize income, then you can do that by
setting up a "provision for taxes" or "tax liability" account, and do the
entries pretty much as described already.   I disagree that you need to
consult an accountant to do this.  This is an example of using accrual
accounting (to recognize assets like accounts receivable rather than
waiting to receive cash payment, and to recognize liabilities like taxes
and accounts payable, before you actually pay cash to settle them) as
opposed to using cash accounting.

Maybe what's not clear is _when_ you should make such accounting entries.
The answer is:  whenever you "close your books", i.e. at the end of each
reporting period, which is at the end of the year, or more frequently, such
as at the end of each quarter or end of each month.  A business can choose
to close books and report financial statements as often as it wants to. On
an ongoing basis, the business will make an entry for each transaction,
such as sale of goods paid by cash, or put on accounts receivable, and such
as receipts of cash to pay off accounts receivable, etc.  At the end of the
period, for a business using accrual accounting, you will possibly make
multiple "adjusting entries" which update your balance sheet accounts and
recognize the proper amount of revenue and expenses.  For example, a
business will:
*recognize/update accounts receivable...this means recording any revenues
that have been earned by the business delivering services or goods, which
have not already been recognized, and also updating for losses from any
accounts receivable which you now recognize cannot be collected
*recognize depreciation, which is a non-cash expense, but needs to be
recognized whenever
*recognize/update accounts payable, e.g. for any goods or services the
business has not yet paid for, if the liability to pay for them has not
already been recognized
*recognize tax liability....this involves recording tax expense in the
amount currently estimated to be due (to be paid later)
For taxes that are very simple, say sales tax which is a percentage of cash
payments received, the tax expense and tax liability may be recognized with
each transaction where cash is received.
For taxes that are more complicated, like business income tax, this is
probably one of the last "adjusting entries" to make because calculating
the tax due depends on the business's income as revised by all the other
entries.
Anyhow, all these adjusting entries are done at the end of each reporting
period.  You don't want to estimate depreciation or make all the other
entries every day, of course, you want to do this only occasionally, e.g.
perhaps at the end of each month.

Long's last email gave a parking lot-based example, and Long
complained/asserted that his question was not answered, because he wanted
to know what cash he needed to set aside to pay taxes at the end of the
year.  But i think the question was answered perfectly well, because the
answers stated how Long should recognize an estimated tax liability, which
is what Long needed to know.  At the end of any reporting period after
adjusting entries have been made, Long would know both how much cash was on
hand, and how much tax liability they had (hopefully less than the amount
of cash), and therefore Long would know how much cash was free to use for
other purposes.
I hope this helps.
--cheers, Donald Cram



On Fri, Mar 20, 2020 at 9:28 AM Adrien Monteleone <
adrien.monteleone at lusfiber.net> wrote:

> Your answer demonstrates precisely why you need local professional advice.
> They can explain it for you based on your specific situation.
>
> Regards,
> Adrien
>
> > On Mar 20, 2020 w12d80, at 2:27 AM, Long <Phamhoanglongvn at outlook.com>
> wrote:
> >
> > Hello,
> >
> > Thank you so much for helping me, guys.
> > I knew that, it's depend on my local. I just want to know cash flow for
> that
> > problems in GnuCash.
> > I had read some post after read your comment, and i see that, maybe i
> will
> > not follow what you told me.
> > You guys doing the same ways. Create the Liability, and Transfer that
> amount
> > to Expense each month for taxable income. I think it's wrong, For
> example :
> >
> > 1 - If you are parking car, you are not owe to the guard (Who will take
> your
> > parking fee when you leave) = Your Revenue is only your, You not owe
> > anything to government.
> > 2 - When you leave that place, you need to pay the parking fee = When the
> > year end, you need to pay personal income tax.
> > 3 - You forgot your money to pay parking fee, NOW, you owe to the guard =
> > You don't have enough money to pay tax, NOW, you owe to the government.
> >
> > I'm always try to make GnuCash follow to my real life (This is what
> GnuCash
> > does). So my decision is i will not create anything "virtual" in GnuCash.
> >
> > i'm not going to spent 10% of my income to pay tax every month. i just
> don't
> > want to spend that 10% of my income every month so that I will have 10%
> of
> > my total income at the end of the year to pay personal income tax.
> >
> > You can have read this post from GnuCash to have more details about this
> :
> > - https://wiki.gnucash.org/wiki/Budget_Requirements
> > From "But as discussed in previous sections ..... (or else it wont be
> > accurate)."
> > From "They aren't going to spent $100 every month ........ The extreme
> > disadvantage of this is that reconciling becomes very difficult."
>
>
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