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

[Michael or Penny Novack]

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

[David Cousens]

That's a reason for using the Equity:TaxProvision account for recording the
liability rather than directly to an Expense:Tax account when you accumulate
the Liability as per the alternative approach outlined in an earlier post.
Then you can adjust it in Equity before paying the tax and transferring it
to expense.

Each Month
   Dr  Cr
Liability:Tax   1000
Equity:TaxProvision   1000 

then adjust it when you know what the tax to pay is
   Dr  Cr
Liability:Tax 2000
Equity:TaxProvision   2000

Then pay the tax and transfer it from Equity to expense(this can be done in
a single 4 split transaction or two two split transactions -  the 4 split
makes it clearer that these are the same financial event).
   Dr  Cr
Asset:Bank   1
Liability:Tax1
Equity:TaxProvision   1
Expense:Tax   1 


David 



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

[Long]

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$, at this time, on DECEMBER in my "Income Statement
(multicolumn)" (It's a Report option to show you, What you have spent and
your revenue each month for the period time) it will show the negative
value.
Example : 
For what i did, INCOME STATEMENT will show this : From Jan to Dec, each
month of Expense:Tax is 1000$, Liability:Tax is 1000$. If on December, I
adjust the value to equal the bill i got from government, so in December,
It's will show you the negative value about "-1000$".
That what i am talking about.
Is It normal ? Or i'm practice wrong ?

P/s: Thank you so much David Cousens, For all you did, I think i will buy a
certificate subscription from webpage you send to me.
Regards.



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

[David Cousens]

You first have to adjust the amount of the Liability and the Expense :Tax
accounts so their balances are each 1. To do this you credit the
Expense:tax and debit the Liability:Tax account each by 2000. After this the
liability and Expense accounts match what you will actually have to pay.

then you make the payment and transfer the money or write a check to the
governement Asset:Bank:Checking  is credited by 1 and the Liability:Tax
is debited by 1 so the balance of  Liability:Tax after the transaction
to pay the tax is 0 - having paid the tax you no longer have a liability but
the balance of the Expense:Tax account is still  1 the amount of tax you
have now actually paid.

so no the P&L report at the end of the year for the year should show an
Expense:Tax of 1.

If you are debiting it at $1000 per month for 12 months its balance will be
12000 and if you then credit it for the $2000 of tax you don't have to pay,
the balance in the account will be 1 not 2000 after that transaction. 

For an expense account a debit increases the balance and a credit decreases
the balance.

While I am happy to help, the function of the User group is not to teach
people accounting but how to do their accounting using GnuCash. You may find
working through the following website useful
https://www.accountingcoach.com/ for learning basic accounting skills.

David 




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

[Long]

Hello David Cousens,

I have practiced about record tax with "accrual accounting", I don't know
how to fix it if in december, the tax amount re difference what i thought.
Example : every month, I Credit Liability and Debit expense (Tax) about :
1000$
At the end of year: My liability about 12000$. But government told me that i
only need to pay 10.000 for tax.
So, i will refund by credit expense and debit liability. By this way, i will
see in P&L report that at the end of year my expense will be "-2000". 
I'm confusing. Or i am practicing wrong? Hope you will help me. I'm learning
from you.

Regards.



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

[David Cousens]

Long,

I think Michael has explained fairly well that virtual accounts are not
simply tricks but different ways of doing different things. 

In some sense all of accounting is just tricks for making sense of our
finances. The most important criteria is "Is it telling you something that
is useful to you in managing your money? If it is then it is fine, if not it
is a waste of time. 

There are some fundamental principles common to all branches of accounting
that are largely embodied in the basic structure of GnuCash and on top of
that a lot that is useful in particular sets of circumstances. It is worth
getting a good grasp of the fundamental principles which are usually in the
first few chapters of most accounting textbooks.

Good Luck

David



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

[Michael or Penny Novack]

P/s: I saw that some people who always use some tricks when using GnuCash ,
like create some "Virtual" Account to manager their money, I DON'T LIKE
THAT.

Not a trick. Virtual accounts and for that matter books for virtual 
entities not some kind of "trick". They can be quite useful.


Envelopes, reserve accounts, etc. are virtual. OK, if a reserve account 
has an actual bank account of its own, not virtual. But when you 
partition a single bank account as if it were more than one, that is 
virtual. Nothing real would prevent you say from writing a check for 
more than the balance of the "remainder" partition. It wouldn't bounce 
as long as the total in the real bank account went below zero. The 
partitioning would just be a reminder to you not to do that, a virtual 
boundary.


Virtual entities might also be useful. To use the example I have given 
before, I want to know how our solar system performs AS IF it were an 
investment with existence separate from ourselves. What is the return on 
this investment taking into account things like the time value of money, 
how it affects/changes other expenses of ours like taxes and insurance, 
etc. In other words, a CORRECT financial analysis instead of the 
incorrect (oversimplified) ones those who get solar systems are shown. 
REAL transactions affect our personal set of books. Those would not show 
things like electric bills we did not have to pay, etc.


So .. I created a virtual entity, "Our Solar System" and a set of 
books for it. As if it were an (actual) entity to which we had made a 
loan for its capital (shown on our books as such) and which pays 
interest (tax free) and makes loan principle payments. It has income, 
tax credits, electric bill amounts we did not have to pay, and sale of 
SRECs. It has expenses, depreciation, loan interest, share of property 
insurance, and implied taxes on the SREC sales. From profits, it makes 
principle payments against the loan. Once the loan has been paid off 
will become an equity investment (an asset) producing "dividend" income.


SOME of these transactions are "real" (appear on both sets of books) and 
others are not. But this does not make the virtual entity a "trick". 
Rather, it is a useful way of obtaining information that would be very 
difficult to extract form our "real" books.


Michael D Novack

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

[Long]

Hello David Counsens,

Thank you for your explained, it's a little hard to understand, because
maybe i'm not an accounting. But it's ok, when i know that IT IS NOT A
TRICK.
P/s: I saw that some people who always use some tricks when using GnuCash ,
like create some "Virtual" Account to manager their money, I DON'T LIKE
THAT.

Thanks again for your confirmed. I Hope someone Who using GnuCash with "Cash
Accounting" like me will see this help.

Regards.



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

[Long]

Hello Dadvid Cousens,

I only have one question more, because I'm not an accounting, And the ways
you guided to me to record tax with "Cash Accounting" look great and i think
it will work for me.

*My question is :
I saw that, i need to credit from "Liabily" and debit to "equity" instead of
"expense". Like you said.

So, is it a trick to control my tax liability? Or it is a way to control tax
liability and following the real life?

Example : Because i want everything in my GnuCash following my real life,
That why i don't create any "saving account" when i didn't have it. Or if i
bought something with my credit card, i won't record it in GnuCash that I
bought it by my Cash in Wallet. I want gnucash show me exactly the amount
and what i did "in real life". Hope you will understand what i mean. 

Now, I'm rebuilding my GnuCash Account structure and use it to control my
real life. I believe that i am following "Cash Accounting". That why i'm
asking you to sure, before let my GnuCash go to work.

Thank you Dadvid Counsens, and sorry for my bad english.
 
P/S: It's look like when i close my book, My expense and income reset to
"0", what i have left are the information about equity, liability, asset.

Regards.



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

[Long]

Hello David Cousens,

Thank you so much for your helped, Your solutions you guided to me have
solved all my questions. My respect to you.

Regards.



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

[David Cousens]

It is sometimes confusing to think of the double entry recording in accounts
as a transfer. There are circumstances where that is appropriate but in many
transactions you record it is not but the second account is usually referred
to as the "transfer" account in the Gnucash documentation.

Each month you credit the Liability:Tax by $100 and debit the Expense:tax
account by $100 which is recording that you estimate you will be obligated
to pay that amount of tax on the income from that month at the end of the
year. This is usually only an estimate because other factors may affect the
income tax the government will actaully require you to pay. So by the end of
the year your liability and expense accounts for tax will each have
increased from the initial balance by $1200. If the initial balance for the
year was $0 then it will be $1200.

At the end of the year I am assuming you have some sort  procedure where you
file a document with the government setting out your income for the year and
any other factors which may affect your income tax and they will then
provide you with an assessment of how much tax you actually owe them and for
the purposes of discussion this is $1000.

At this point your actual liability is no longer what you estimated from
your income during the year at $1200 but is only $1000. This requires the
Liability:Tax  and Expense:Tax accounts to be adjusted so the balances are
only $1000. To do this you create an adjustment transaction to debit the
Liability:Tax account by $200 and credit the Expense:Tax by $200. Now the
lIability:Tax account balance indicates what you actually owe the government
and the Expense:Tax account will indicate what you have paid in tax once you
pay the tax to the government.

When you pay the government, you no longer have an obligation to pay them
tax so the Liability:Tax is reduced from $1000 to $0 by a debit for $1000
and your check account balance is reduced by a credit to it of $1000. 

Because GnuCash and accounting generally uses a double entry system each of
the above transaction debits one account by the transaction amount and
credits another account by the same amount. 

(More complex transactions affecting  more than two accounts are also
possible in accounting and in these the sum of the debits to accounts is
equal to the sum of the credit to accounts in the transaction but they are
not needed to explain this situation.)

This is one way of doing the book entries which is slightly simplified and
OK if you are using accrual accounting. Another way which is more
appropriate for cash accounting is not to use the Expense:Tax account to
record the tax you estimate yo owe each month but to use an account under
Equity so the monthly tranasaction becomes

   Dr Cr
Liability:Tax  100
Equity:TaxProvision   100

At the endof the year each of these accounts ends up with the $1200 balance
as before. Again when you receive an assessment form the government
indicating that you actually only have to pay $1000 in tax, you have to
adjust these account balances in the same manner as the last example.
   Dr Cr
Liability:Tax  200
Equity:TaxProvision  200

and when you pay the tax you record it with entries like this:
DrCr
Asset:Bank:Checking   1000
Liability:Tax 1000
andDr   Cr
Equity:TaxProvision  1000
Expense:Tax1000

The difference is that you do not record the tax as an Expense in cash
accounting until you actually pay the money to the government.

David



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

[Long]

Hello,

I'm sorry, maybe i am misunderstanding. So what should i record this
correctly? 
>From 1 to 12 of year :
* 1 :
I need to transfer from "liability:tax" to "expense:tax" 100 each month
At the end of year, i owe 1200 because Liability:tax is 1200
And when i pay tax, i transfer from asset to Liability:Tax 1200.
Right ?
And my question is: if the end of year, I just pay tax about 1000 Because
for some reasons. How can i record this ?
Now, Liability still have 200, I need to transfer from "expense:tax" to
liability:tax ( in december) 200 in December? 

* 2 :
Or you mean, i will transfer 100 each month from Asset to Liability. Now at
the end of year, Liability:Tax is "-1200". When i pay tax in December, i
will transfer from Liability to expense:tax ? 
Now, I have to pay 1000 for income tax, and my Liability is : -200, so i
will transfer that amount back to my asset ?

Sorry, But i'm confusing now.

Thank you david, you are helped me a lot. Waiting your Reply.
Regards.



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

[David Cousens]

Hi Long 

Yes, the transaction when you pay tax is as follows

 Dr   Cr
Asset:Bank:Checking 1000
Liability:Tax   1000

to pay the tax and

Liability:Tax 200
Expense:Tax200

to correct the overestimate of your tax as you indicated. If you had also
createda Asset:ban:Provision for Tax account the payment would have come out
of that rather than the checking account and the excess funds in that
account would be reurned to your main checking account as well.

David



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

[Long]

Hello Adrien Monteleone-2,

I understand what you mean by using liability instead using "Contingency
Fund". But, Should i record the transactions WHEN my Liability:Tax = 1200,
and at the end of the year, i just need to pay tax 1000 ?
I will return that money back to my liability in december ? (Credit
"Expense:Tax" and Debit "Liability:Tax").

Regards.



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

[Adrien Monteleone]

It is a two pronged approach, not really a one-or-the-other type situation.

By booking the liability your Balance Sheet will correctly reflect your net 
worth. If you owe money, it should deduct from your net worth. If you don’t 
book the liability, your net worth appears larger than it really is. (making it 
look like more of your assets in-hand, are really yours to spend as you wish.)

How important that is to you, or if that runs afoul of any laws in your 
jurisdiction is not for us to determine.

Using a separate account, real or virtual to segregate funds (assets) is a 
mechanism to prevent yourself from spending them so you will have the funds 
when you need to pay the liability. But that isn’t a substitute for recognizing 
the liability in your books.

Step 1 is recognizing the liability.
Step 2 is setting aside the money to pay that liability later.

Regards,
Adrien

> On Mar 21, 2020 w12d81, at 1:07 PM, Long  wrote:
> 
> Hello GnuCash - User mailing list,
> 
> Thank you for helping me. If I following your steps by "SAVE" Account ( Or
> whatever it's mean, in your case: it is contingency fund) to have enough
> money to pay TAX at the end of the year. It's look like make sense more than
> using a Liability to solve the problems.
> 
> Thanks again for your help.
> 
> Regards.

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

[Long]

Hello GnuCash - User mailing list,

Thank you for helping me. If I following your steps by "SAVE" Account ( Or
whatever it's mean, in your case: it is contingency fund) to have enough
money to pay TAX at the end of the year. It's look like make sense more than
using a Liability to solve the problems.

Thanks again for your help.

Regards.



--
Sent from: http://gnucash.1415818.n4.nabble.com/GnuCash-User-f1415819.html
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Re: [GNC] Contingency Funds was: Re: How to record Personal income tax ?

[Adrien Monteleone]

Yes, one can simply track the liability, but this goes a step further and 
attempts to segregate savings to meet it. (the basis of the ‘envelope’ method)

For budgeting purposes, the envelope method isn’t easy with GnuCash and 
requires lots of extra work, but a simple segregation of funds like you mention 
is certainly doable. Having an actual additional account at a bank is even 
better.

From my past readings on the list, there are some here using GnuCash for their 
churches. Hopefully one will see this thread and chime in.

Do you have some specific issues you’ve encountered so far that you need help 
with? (If not related to a contingency fund, perhaps start a new thread like 
you did here, so the topic is more visible)

Regards,
Adrien

> On Mar 21, 2020 w12d81, at 9:17 AM, Eric H. Bowen via gnucash-user 
>  wrote:
> 
> While I do agree that for specific tax guidance Mr. Long should turn to
> experts from his locality and system of laws, it seems to me that what
> would help him is information on setting up and using a "Contingency
> Fund"...in his case, for taxes, but in the general it could be applied
> to maintenance or other unpredictable expenses where your funds are
> commingled with, say, your checking or savings account but where you
> wish to designate a specific portion of those commingled funds for that
> purpose and add to it on a regular basis whenever it drops below a
> certain level.
> 
> Suppose, as an example, that you had a nonprofit such as a small church
> with one savings account. They keep $12,000 in a maintenance contingency
> fund. One day the air conditioning compressor for their sanctuary goes
> out, and it costs $3,500 to repair which was not in the regular general
> maintenance budget. They wish to pay for the repairs out of their
> contingency fund, and then direct, say, $250 per month back to the fund
> until it returns to the $12,000 level.
> 
> This could address Mr. Long's situation; say that he sets aside $350 per
> month (or whatever his accountant/bookkeeper tells him is a reasonable
> estimate) in a tax contingency fund and at the end of his accounting
> period, with help from his accountant, he determines his actual tax
> liability and pays that amount out of the contingency fund. The balance
> of the fund then could be set aside for next year's taxes or
> redesignated for general spending.
> 
> I'd appreciate guidance in this matter myself as I'm trying to set up
> Gnucash for my own church. I do plan to retain a local accountant to
> review my accounts and books, but I'd like to do as much of the basic
> groundwork myself as I possibly can. Thanks for any help.


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

[Eric H. Bowen via gnucash-user]

While I do agree that for specific tax guidance Mr. Long should turn to
experts from his locality and system of laws, it seems to me that what
would help him is information on setting up and using a "Contingency
Fund"...in his case, for taxes, but in the general it could be applied
to maintenance or other unpredictable expenses where your funds are
commingled with, say, your checking or savings account but where you
wish to designate a specific portion of those commingled funds for that
purpose and add to it on a regular basis whenever it drops below a
certain level.

Suppose, as an example, that you had a nonprofit such as a small church
with one savings account. They keep $12,000 in a maintenance contingency
fund. One day the air conditioning compressor for their sanctuary goes
out, and it costs $3,500 to repair which was not in the regular general
maintenance budget. They wish to pay for the repairs out of their
contingency fund, and then direct, say, $250 per month back to the fund
until it returns to the $12,000 level.

This could address Mr. Long's situation; say that he sets aside $350 per
month (or whatever his accountant/bookkeeper tells him is a reasonable
estimate) in a tax contingency fund and at the end of his accounting
period, with help from his accountant, he determines his actual tax
liability and pays that amount out of the contingency fund. The balance
of the fund then could be set aside for next year's taxes or
redesignated for general spending.

I'd appreciate guidance in this matter myself as I'm trying to set up
Gnucash for my own church. I do plan to retain a local accountant to
review my accounts and books, but I'd like to do as much of the basic
groundwork myself as I possibly can. Thanks for any help.


Eric H. Bowen
e...@ehbowen.net 
On 3/21/2020 6:07 AM, gnucash-user-requ...@gnucash.org wrote:
>
> Message: 9
> Date: Sat, 21 Mar 2020 05:34:13 -0500 (CDT)
> From: Long 
> To: gnucash-user@gnucash.org
> Subject: Re: [GNC] How to record Personal income tax ?
> Message-ID: <1584786853837-0.p...@n4.nabble.com>
> Content-Type: text/plain; charset=us-ascii
>
> Hello,
>
> Thank you doncram and david cousens,
> Yes, I'm not accounting and having trouble to record that problems. Please
> help me if i'm going wrong again.
> Example: Let make things easier to understand for me.
> 1 - I will pay rent at the first month of each year = i will pay tax at the
> first month of year.
> 2 - I do not pay rent to landlord each month = i do not pay tax to
> government each month.
> 3 - i just accumulated my money each month to pay rent = same to pay tax.
> 4 - In fact, I'm owed to my landlord each month because using his house =
> it's the same thing about pay tax.
>
> => For 4 things i talking above : in GnuCash, i need to create "Liability"
> about pay rent, each month, i need to credit "liability:pay rent" and debit
> to "expenses:pay rent". After 12 months, i will pay rent to landlord by
> credit my "assets" and debit to "liability". Right?
> So, i should do the same thing to PAY PERSONAL INCOME TAX ?
> I will have "Liability:Tax" and "expense:Tax", transfer my money each month
> between that account, at the end of the year, my government will tell me
> what amount i need to pay, if the amount are smaller, i will make a refund
> from "expense:tax" to "liability:tax" and pay it, if larger, just plus more
> amount into "expense:tax". Right?
>
> For that things above: Is it called accrual accounting ?
> Example i wrote above told me that: GnuCash still look like the real life.
>
> P/S: I'm not accounting, and i respect you (all guys) for take your time to
> help me. Thank you.
>
> Regards.
>
>
>
> --
> Sent from: http://gnucash.1415818.n4.nabble.com/GnuCash-User-f1415819.html
>


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