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

Michael or Penny Novack stepbystepfarm at comcast.net
Sat Mar 28 16:58:03 EDT 2020


On 3/27/2020 9:11 PM, Long wrote:
> Hello David Cousens,
>
> Thank you for your help, I knew what i need to do if i choose "Accrual
> Accounting".
> What i'm asking you is : If the end of the year, I credit my Expense:Tax and
> debit Liability:Tax 2000$, at this time, on DECEMBER in my "Income Statement
> (multicolumn)" (It's a Report option to show you, What you have spent and
> your revenue each month for the period time) it will show the negative
> value.

I think there are two things you will need to do.

The first is to read some tutorial or text "introduction to double entry 
bookkeeping with emphasis on trying to understand what the differences 
between "cash" and "accrual" basis are and what they are not. Also with 
accrual accounting,  how adjustments are made then the actuals (when 
these become known) do not match what was originally entered.

The second is to try to understand time/date of financial statements. 
When I settle up with the government is it NEVER in the same year as the 
taxes were for. Thus I could never expect the "tax expense" on the end 
of year report to be anything other than an estimate of tax expense. I 
won't know the actual amount (may be either more or less) until I do my 
taxes and settle with the IRS.

So in your example, starting the NEXT year with -2000 in tax expense is 
correct because your P&L for the year just ended had been overestimated 
by 2000.  Maybe you would feel more comfortable entering the correction 
transaction as a so called "journal transaction. Accounts of type income 
and expense are actually temporary accounts of fundamental type equity. 
So when you settle with the government, instead of:

tax liability  debit 12,000    cash credit 10,000   tax expense credit 2,000

tax liability  debit 12,000    cash credit 10,000   equity credit 2,000

This is correct. Your previous year end report had you 2,000 poorer than 
you really were (because you didn't really owe the gov't as much as you 
thought you did. You are now correcting that by increasing your equity 
by that amount. On the other hand, you might prefer the -2000 in tax 
expense if you want to look at a series of YE reports for the 
information "what is my tax expense per year" << look ahead to the 
following years assuming the amounts continue the same >>

Michael D Novack

PS -- Gnucash doesn't substitute for learning basic accounting, you 
still  have to learn that, and we are here to help with HOW when using 
gnucash and not the WHAT of basic accounting.







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