Help My Accounting Duh

August 30, 2010 6:52 PM

In double-entry bookkeeping, are taxes a liability or an expense?

I am new to GnuCash, and attempting to use it for family finances. Will clap for tips.

posted by swift to Work & Money (8 answers total)

In the end they are an expense.

For business taxes-
If you're accrual, they are a liability until paid at which point they become and expense.
If you're cash, they are an expense upon payment.

For home personal takes-
Always an expense.
posted by Nickel Pickle at 7:09 PM on August 30, 2010

GnuCash: Record Income Tax Installments and Year-End Payments
posted by bitdamaged at 7:13 PM on August 30, 2010

(in general business accounting - if I recall correctly - they're usually a current liability)
posted by bitdamaged at 7:14 PM on August 30, 2010

In double-entry bookkeeping, are taxes a liability or an expense?

Under accrual accounting, assets are sources of cash and liabilities are uses of cash.

Accordingly, taxes are liabilities.

But, are you using a cash accounting system or an accrual one?
posted by dfriedman at 7:18 PM on August 30, 2010

Response by poster: I think I'm using cash accounting. I'm counting transactions that already happened.
posted by swift at 7:30 PM on August 30, 2010

For personal accounting, which is what I use GNUcash for, it depends on whether your taxes are due once a year with suggested quartly tax estimates, or if your employer withholds them. In my case I just put tax withholdings as an expense and rebate the refund at the end of the year. Perhaps someone will educate me on why this is wrong, but I think it's pretty sane; if you're filing correctly you shouldn't get a very big refund.

Other taxes, like sales tax, I just expense immediately. The only things I have in liabilities are my car loans, student loans and credit card.

Tip: GNUcash has a system to import transactions from online systems for many banking services. It makes data entry easier, but the reconciliation process is a bit confusing; A / R stand for accept reject, and the importer tries to match up transactions with older ones, so watch out if you eat too much fast food and order the same meal (price) from the same store.
posted by pwnguin at 7:42 PM on August 30, 2010

Taxes are always going to be an expense; your question really is what is the corresponding offset.

If you're using cash accounting, your offset is cash (an asset, which you're decreasing):

Debit Tax Expense
Credit Cash

If you were using accrual accounting, your offset would be tax payable (a liability, which you're increasing):

Debit Tax Expense
Credit Tax Payable

Later, when you pay the taxes, you would Debit Tax Payable (this would zero it out) and Credit Cash.
posted by yawper at 7:43 PM on August 30, 2010 [1 favorite]

Cash accounting means you only record transactions when the cash has changed hands, not when you give or receive an item or service. So you are always using your cash account and some revenue or expense account. In accrual based accounting, you record the transaction when the item or service changes hands (usually as an account payable or receivable vs your revenue or expense account), and then clear out the payable/receivable when you receive cash. You are probably using accrual accounting, if you have liabilities, because cash basis doesn't recognise debts in the same way. (I am simplifying a great deal here.)

Yawper has the correct debits/credits to use.
posted by jeather at 7:57 PM on August 30, 2010