Remove VAT amounts from cash flow report

Question

I am using Gnu Cash to track my personal expenses as well as my freelancing income.

On some of my income I receive VAT which I then have to pay back. Currently the income/expense cash flow report is skewed because that VAT appears on both places.

The income payment (transaction) is one-time, including VAT. After a month (or before), there is a transaction that returns the VAT on my payment back to the state. Is there any way where I can subtract this amount from 'money in' instead of having it show up in the 'money out' section?

I have this problem not only with VAT but with cashbacks as well (electricity, health insurance, erroneous payments). For those I would like the positive flow to be extracted from 'money out' instead of having it show up in 'money in'.

Answer 1

Perhaps you can track your VAT amounts in a Liability account. Using a tax liability account is a common thing in accounting.

To do this, when you receive money, split the transaction such that your actual revenue (which you will keep after VAT remittance) goes into an Asset account, and the amount you will eventually have to pay back to the state goes into a Liability account. Later, when you pay the VAT back to the state, your transaction will effectively "pay back" the liability, with one end of your double-entry decreasing the funds in your checking account, and the other end decreasing the funds in your tax liability account.

Having said that, I've found that there are many shortcomings in the Cash Flow report, and I'm not sure that using a tax liability account (which I think is the Right Thing to do) will necessarily solve this problem for you...