[GNC] Contingency Funds was: Re: How to record Personal income tax ?

[David Cousens]

No it is not a trick. Accounting practice aims to record events as
transaction at times according to a number of accounting principles and
rules. If you are required to use accrual accounting, it would be legitimate
to record the tax as an expense when the income that produces that liability
is earned. If you are not required to use accrual accounting then you do not
want to record the tax as an expense until you actually pay it which is why
the  credit to the liability account is matched with a debit to an equity
account which makes a provision for paying tax. The creation of the
liability when you earn income is still reducing you equity in either case.

Most accounting practice is aimed at recording financial events as they
occur in real life.  All Expense accounts are actually accounts in Equity
but accountants distinguish between events which occur in the current
accounting period (which may be a calendar year , a financial year, six
monthly, quarterly or monthly depending generally on requirements to report
to financial authorities, but usually annually) by creating temporary equity
accounts which are given the account types/names of Income and Expenses. 

In traditional accounting practice they are cleared to equity at the end of
the year, i.e. transactions are created which reset the Income and Expense
account  balances to 0 and transfer the balances to equity. For a business,
this is the profit or loss for the accounting period. GnuCash has  a closing
procedure but this procedure is largely a hangover from  accounting done
with pen and paper in ledgers. Gnucash's reports produce the correct reports
for an accounting period without having to "close the books" formally and
closing the books can produce some unwanted effects in the reports. These
are generally fixed when they are discoverd so that either approach works. 

In business accounting, the calculation of tax traditionally takes place
after the books have been closed to
an Equity:Retained Earnings account and the payment of tax is often recorded
against the retained earnings rather than against an Expense account (as are
the payments of dividends to shareholders and other distributions of the
profits of the business to the participants).

David




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David Cousens
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