[GNC] How to record Personal income tax ?

[David Cousens]

Long,

I think you are misunderstanding. Cash flow is a different concept from
making provision for liabilities which will arise in the future. Having done
the latter may however help  ensure that your cash flow in the future is
sufficient to meet your liabilities in the future. It is complicated further
because we don't initially know how much you know about accounting and what
it is you are really using GnuCash for.

Liabilities are not virtual accounts, they reflect real events which have
either occurred or will occur as a result of a current event.  In this case
the current event is the earning of income which creates a liability to pay
tax which you will have to pay at a future time. Your income is not earned
at one point of time but may be paid to you weekly, fortnightly, monthly
etc., so your liability to pay tax accrues as you pay income.  You do not
actually pay the tax at this time, just recognize in your accounts that you
will have to at the end of the year and estimate how much.

If your personal affairs are fairly simple you may have a good idea of how
much tax you will pay so recording the liability may not be necessary for
you. But if you are an investor with many complex transactions, knowing how
much you will owe when the taxman comes calling may be much more difficult
to estimate and the above recording may become a necessary evil. Only you
can decide what you need based on your circumstances. We can only advise you
on how you can do it and specifcally how you can do it with GnuCash not
whether you should or not.

There are a number of basic principles in accounting practice that underly
what is known as accrual accounting associated with recognition of income
when it is earned, matching expenses to income and the timing of events.
Another principle is prudence which translates as making sure you have the
cash available when it is needed. 

Cash accounting on the other hand only recognizes income when you receive it
and expenses when you pay them. You will need to decide which is more
appropriate for your purpose. Most legal jurisdictions will allow you to use
cash accounting for business purposes under a specified threshold of income
or turnover and it is generally sufficient for most personal accounting that
does not involve business transactions.  Many businesses are however
required to use accrual accounting.

The https://www.gnucash.org/docs/v3/C/gnucash-guide/index.html explains some
of this in a fairly condensed form. A textbook on Financial Accounting may
also help if you are not familiar with the terminology. As with most
professions accounting has very specific meanings for commonly used words
which may have a different meaning to their meaning in everyday use by the
public.

David



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David Cousens
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