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Regular Member
 
Group: Forum Members
Last Login: 16/08/2010 4:56:18 PM
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Hi,
I have just reviewed my accountants audit of the our 07-08 return, Under liabilities it shows income tax payable,This seem to be a running total of the 06-07 and 07-08. Since income tax for 06-07 and 07-08 has already been paid I don't understand where I have gone wrong.
I entered the tax expense under Cr 5220 and Dr 1104, why doesn't the total liability for tax payable reduce in the balance sheet.
Can you please explain how I should correctly enter a Tax expenditure. Detailing the account codes I should use so I can reduce this Liability in the balance sheet.
Thanks.
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MySF Administrator
Group: Administrators
Last Login: 17/05/2010 6:31:15 PM
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Hi,
Payment of a tax expense incurred last year should not be
DR 5220 $x
CR Bank $x
Instead it should be:
DR 2120 Income tax payable $x
CR Bank $x
The expense was incurred last year and it shows in the P/L for last year. In the current year it should not go to expense again as that would be double counting.
Another way to explain it is that you recognise the expense for last year, but do not pay it immediately so it becomes a liability (income tax payable), so when you pay it off in the new year you reduce that liability (rather than recording the expense again).
Regards,
MySF
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Regular Member
Group: Forum Members
Last Login: 16/08/2010 4:56:18 PM
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Hi
I am still not sure how to correctly record a Tax Expense.
When a PAYG installment is paid for the current year in the current, should it be:
Dr 5220
Cr Bank
and if I have a Tax Expense from the previous year should it be:
Dr2120 income tax payable
Cr Bank
Please confirm if the above is correct?
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MySF Administrator
Group: Administrators
Last Login: 17/05/2010 6:31:15 PM
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Hi,
This depends on when the expense is incurred and when it is paid.
If you incur the expense and pay it straight away then the entry should be:
DR 5220 Tax expense $ x
CR Bank $ x
The entry to the expense account (5220) is the expense and the entry to the bank is the cash flowing out to pay that expense.
The important thing is that these two events do not typically occur at the same time for tax.
A more likely scenario is that you incur the tax expense at D1 and then pay it at some later point, at D2.
In this case the entries are:
D1) Incur the tax expense, as happens at the end of the year. Store this as a liability since you are now obliged to pay it:
DR 5220 Tax expense $ x (increase expense)
CR 2120 Income tax payable $ x (increase the level of liability)
D2) Pay the money owed. This is the cash flow that reduces the liability of the money owed
DR 2120 Income tax payable $ x (reduce liability)
CR Bank $ x (cash flows out)
Breaking up what looks like one thing (tax expense payment) into two separate events is called accrual accounting.
Important: if you are paying tax instalments during the year in preparation for the tax bill then the entry will be:
DR 2130 Tax instalments paid $ x
CR Bank $ x
Regards,
MySF
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Regular Member
Group: Forum Members
Last Login: 16/08/2010 4:56:18 PM
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Hi,
I still don't fully understand, can you further explain.
1. If I have incurred a Tax expense from a previous year I received the bill and pay it immediately is it entered
DR 5220 Tax Expense $x
CR bank $x
or should it be
DR5220 Tax Expense$x
Cr 2120 Income tax payable $x
and then
DR 2120 Income tax payable $x
CR Bank $x
2. If I'm paying tax installments during the year in preparation for a tax bill are there any other entries that follow these entries
DR 2130 Tax installments Paid $x
CR Bank $x
Regards
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Master Member
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Last Login: Today @ 3:41:34 AM
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Hi remp,
If you don't mind me adding my take, I find it easier to think of this in terms of the three different events that are happening:
1) During the financial year (say FY01) you pay tax installments $x - these are essentially pre-payments against the tax you will be due to pay for FY01.
2) At the end of FY01, the year end rollover calculates the tax due for the year $y and credits the $x installments already paid - leaving a tax liability of $z = $y-$x
3) You lodge your return, receive your FY01 assessment and (assuming no other complications) the assessed amount $z = the outstanding tax liability $y-$x. You pay the amount due $z and the payment occurs in FY02 .
I had already had to do the above to get my head around how it all works - so I hope it makes sense to you!
Regards,
This is handled in the accounts as:
During FY01:
1) Tax installments are paid:
CR 11** Bank: $x
DR 2130 Tax instalments paid: $x
You enter this when you make the payment.
FY01 Year End:
2) During the year end rollover, various relevant calculations and transactions are made automatically, eg
CR 2210 Imputation Credit tax rebate: $ya
DR 2120 Income tax payable: $ya
CR 5220 Tax Expense: $yb
DR 3505 Profit & Loss: $yb
CR 2120 Income Tax payable: $yb
DR 5220 Tax Expense: $yb
CR 2130 Tax instalments paid: $x
DR 2120 Income tax payable: $x
These transactions are all generated automatically by the MySF year end wizard as part of the end of year rollover process. The above are just examples and your fund may have more/different transactions. With the above example, tax of $yb has been calculated, franking credits of $ya have been rebated against this, the tax installments paid of $x have been credited against this and the net effect on 2120 Income tax payable is:
CR 2120 Income Tax payable: $yb
DR 2120 Income tax payable: $ya
DR 2120 Income tax payable: $x
And if these are the only relevant transactions, the balance of 2120 Income tax payable is $z = $yb-$ya-$x.
During FY02:
3) FY01 Tax Bill is paid:
CR 11** Bank: $z
DR 2120 Income Tax payable: $z
Summary
The net outcome of all the above is:
1) The tax installments and the tax bill have been paid from the bank account:
CR 11** Bank: $x (installment paid FY01)
CR 11** Bank: $z (tax bill paid FY02)
2) Tax expense and tax installments paid have been cleared:
CR 5220 Tax Expense: $yb
DR 5220 Tax Expense: $yb
DR 2130 Tax instalments paid: $x
CR 2130 Tax instalments paid: $x
3) Income tax payable has been cleared:
DR 2120 Income tax payable: $ya
CR 2120 Income Tax payable: $yb
DR 2120 Income tax payable: $x
DR 2120 Income Tax payable: $z (where z=yb-ya-x)
4) The FY01 accumulated imputation credits have been used (applied against tax):
CR 2210 Imputation Credit tax rebate: $ya
5) The FY01 Profit has been reduced by tax:
DR 3505 Profit & Loss: $yb
Neil H.
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Master Member
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Ooops,
I seem to have inserted theI had already had to do the above to get my head around how it all works - so I hope it makes sense to you!
Regards, in the body of the post rather than at the end!
Apologies for that,
Neil H.
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MySF Administrator
Group: Administrators
Last Login: 17/05/2010 6:31:15 PM
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Hi,
The explanation from Neil H above is very good and is in line to what we would have written as a response. Please do not hesitate to ask any additional questions if you would like to know more.
Regards,
MySF
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Regular Member
Group: Forum Members
Last Login: 16/08/2010 4:56:18 PM
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Hi Neil H,
Thanks for taking the time to add your take,(as you say) I found it helped me make sense of the entries required .
I have a another question regarding Tax installments paid in the next Financial year, like now i have a tax installment for last year to be paid in July .
1. Is this Tax Installment entered the same way as listed earlier?
2. Are there and further entries to be made with regard to this Tax Installment?
3. If so Can you use the same detail as above, I found this detail very helpful.
Thanks
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Master Member
Group: Forum Members
Last Login: Today @ 3:41:34 AM
Posts: 107,
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