6

I am trying to put my personal finances in order and I figured that accrual accounting fits my needs for keeping a better track of my records. I am new to accrual accounting and while I think that I understand the concept, I have some questions when it come to practice in my personal finances.

In my country, every June we learn how much we have to pay for property tax for the running year. If I learned in June (2018) that I have to pay $12,000 for the year 2018 then I paid it immediately.

When I look at my records in later years, it makes more sense to see this $12,000 tax obligation as a monthly $1,000 expense throughout 2018 rather than a sudden $12,000 expense in June of 2018 (as it would appear if I keep a cash-based workflow).

However, I'm not sure how I would configure this using accrual accounting. I am guessing the following:

  • I create an asset account "Assets:Prepaid property tax" and an expense account "Expenses:Property tax"
  • In June 2018 in my book I credit my "Assets:bank account" with $12,000 and I debit my "Assets:Prepaid property tax" with $12,000
  • For every month of 2018, I credit $1,000 in "Assets:Prepaid property tax" and I debit $1,000 my "Expenses:Property tax"

Is that a proper solution using accrual book keeping? When it comes to taxes, intuitively I would expect that I should have some liability account somewhere. Is this the case? If so, what would be a better way of doing all this?

4
  • 3
    If you're bookkeeping for your personal finances, then this question is on-topic. Accounting questions are only off-topic where they do not relate to personal finance. Commented Sep 18, 2018 at 20:14
  • 1
    Gee, guys. I'm really somebody who is trying to put in order his personal finances. If I just write this in my question it's magically on-topic? Sorry, don't mean to appear rude, but I did put effort in writing a proper question and do my homework before posting.
    – geo909
    Commented Sep 19, 2018 at 4:07
  • 1
    "If I just write this in my question it's magically on-topic? " - well, yes, after all, all we have to go on in deciding whether a question is on-topic is the text of the question. So your edit, which changed the question text, changed the question from not on-topic to on-topic, and it got reopened. The system works! :)
    – AakashM
    Commented Sep 20, 2018 at 8:05
  • @AakashM Ok, makes sense, thanks to Bob for the editing!
    – geo909
    Commented Sep 20, 2018 at 12:28

1 Answer 1

3

I'm not an accountant. But I see that no accountants have supplied an answer to this question, so I'll have a crack.

You are correct in considering the $12,000 bill as a liability that accrues progressively over 12 months, not a sudden expense on a particular date. If you were really fanatical, you could progressively accrue that liability in 365 instalments, or in 52 instalments - but accounting for it in 12 instalments feels about right.

If I understand your question correctly, each June you receive a bill for your property tax for the current calendar year (January to December). Therefore if you pay the bill at the end of June, half of the payment is a payment in arrears (for tax expenses Jan to Jun) and half is in advance (for the period Jul to Dec).

Theoretically, the unpaid taxes accruing from January to June are a growing liability, and the prepaid amount covering the period June to December is an asset with a reducing balance. You could open a liability account and an asset account to reflect this, but I'd suggest that the scheme you've already proposed is superior.

A liability is a negative asset, and an asset is the opposite of a liability. So you can use either a liability account or an asset account (with a negative balance as appropriate) to indicate whether you owe money to the Tax Office or if you have prepaid money to the Tax Office to cover future expenses.

In short, the system that you proposed is entirely suitable for capturing the growing liability to pay property tax and for showing any prepayment of tax that you've made. Just remember:

  1. A negative balance in the "Assets:Prepaid property tax" account represents a liability to pay that amount in future, and
  2. Amounts accrued from January to June will be based on your predicted tax bill. If the actual tax bill received in June is for a different amount, you will need to make an adjusting entry to alter the Jan to June accruals.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .