USA Tax accrual question - asset or liability?

[KSitton]

Hello,

I would like to create an accrual account on our balance sheet for taxes that are due and payable for the current year and expense a portion due on a monthly basis so there is not a large hit on our monthly P&L statement. The issue is that we don't actually receive the bill until after April. So I'm unsure as to whether I should be creating an asset or liability account. I believe it should be a liability account, since we won't know the exact amount to be paid until April, but was hoping for confirmation.

Thank you!

 

[Drmdcpa]

Asset v liability? Really? How could an amount owed be an asset?

 

[KSitton]

Mid year we pay the bill in full, so at that point we've paid in advance. Just looking for some support / clarification. Thank you for the help.

 

[Drmdcpa]

Oic. Prepaid tax is an asset.

 

[KSitton]

Asset v liability? Really? How could an amount owed be an asset?

Mid year we pay the bill in full, so at that point we've paid in advance. Just looking for some support / clarification. Thank you for the help.

 

[KSitton]

I think the issue I'm looking for clarification on is that from Jan-May I would be accruing for the tax (liability) and paying the entire bill for the year in Jun, at which point it would be prepaid for the remaining months within the year (prepaid). So which is the appropriate method?

 

[Drmdcpa]

First half of year

Debit expense credit liability

At payment debit liability to zero it out, credit cash, debit asset for prepaid portion.

Remainder of year debit expense, credit asset.

This is cumbersome but technically correct.

 

[KSitton]

Okay. That sounds right, and also what I was afraid of...thank you for the help. Much appreciated!

 

[b03liberty]

Hello,

I would like to create an accrual account on our balance sheet for taxes that are due and payable for the current year and expense a portion due on a monthly basis so there is not a large hit on our monthly P&L statement. The issue is that we don't actually receive the bill until after April. So I'm unsure as to whether I should be creating an asset or liability account. I believe it should be a liability account, since we won't know the exact amount to be paid until April, but was hoping for confirmation.

Thank you!

Hello KSitton, in computing tax for the current accounting period which the amount is yet to be know like this , you have to make a comparison to what you paid last period and make a provision for this current period.
Understandable your provision will be "under or " over", any subsequent balance you are having will then be deferred to the next accounting period

 

[b03liberty]

Hello KSitton, in computing tax for the current accounting period which the amount is yet to be know like this , you have to make a comparison to what you paid last period and make a provision for this current period.
Understandable your provision will be "under or " over", any subsequent balance you are having will then be deferred to the next accounting period

The under provision balance will be Deferred tax liability, then you will add it to the next period while over provision is deferred tax asset which you will deducted

 

[Larry Bailey]

The other posts are accurate. I will reiterate with an example. Lets say you budget or estimate your taxes to be $12,000 for the coming year. Each month you would prepare a JE debiting Tax Expense of $1,000 and crediting A/P Taxes Liability for $1,000. When you do pay the taxes it is merely a credit to cash and a debit to A/P Taxes Liability for the amount paid. This amount paid may be more or less than the amount you budgeted so the final entry can be a reduction of expenses and liability if you accrued too much or an increase in expenses if it is more than budgeted.