taxes, accountingMy question is probably trivial for most of you, but I can’t quite figure it out on my own. After browsing internet I got even more confused…
I have a bank transaction for the income taxes I paid for previous tax year. The number I got from my accountant.
I’m trying to use an online bookkeeping software (Zoho Books). The only relevant option Zoho Books offers me to categorize it as Tax Payable. As a result I have negative tax liability. My understanding that after payment is made my tax liability account should show 0.
In order to make it 0 I need to add another record with corresponding positive Tax Payable liability showing that I owe taxes.
What would be the right way to do it? Or am I getting it all wrong?
You are confused. Let me see if I understand your question. You filed your 2014 tax return in 2015. The amount you paid was the amount on your tax return prepared by your accountant. You want to know which account to enter that payment. Let me ask a couple of questions. Do you know what accrual method of accounting is? If you don’t then you are probably not using that method. You are probably using the cash method. To distinguish between the two methods, the accrual method has accounts receivable and accounts payable. The cash method does not. If you are not sure which method you are using, look on your tax return. Your accountant will have checked the box on which accounting method used. Let’s assume you are on the cash method. In that case the tax payment goes to an expense account called taxes paid. The Taxes Payable account is not used. For accrual method, the entry is a bit more complex. Make sure you are on the accrual method before you attempt this because it is difficult to understand. If you are on the accrual method and your books have not already been set up, you need to ask your accountant for a 2014 adjusted trial balance. Enter these balances on the date of December 31, 2014. There should be an amount in the Taxes Payable account. When you record your payment under the accrual method to that Taxes Payable account, the balance should come to zero. If you truly are on the accrual method, I highly recommend you let your accountant set up your books and give you instructions on what to do. The accrual method of accounting is somewhat complex and you need instruction on how to understand and use that method.
If you are on the cash method, you do not use the taxes payable account. You use the tax expense account only.
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