Accounting question

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Accounting question

Ruth Morley
I think this is an accounting question rather than a gnucash question but
here goes.
 ordered a household item which I then returned. The original purchase went
into Expenses:Household and then I got a rebate.
Now should I put the rebate amount into the expenses:household or should I
set up a new income category which is for instance Income:Rebates.
I think the former would make more sense to me but may not be correct.
Ideas??
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Re: Accounting question

Buddha Buck
It is an accounting question, but I'll put in my 2 cents anyway.

Either method will result in no change to your balance sheet accounts, and
no change to the bottom line on your income (profit and loss) statement.
Overall, the end result is basically the same. In the end, the result of
the purchase and refund should be no change in your overall status. Since
income and expense accounts are, in a sense, ephemeral, in the long run it
isn't necessarily important which way you go.

But... what questions are you asking of your accounting system?

Are you asking "What income do I have to pay tax on?"? If so, then you
should consider how this purchase/rebate would affect that. The
purchase-rebate scenario is most likely tax neutral in your jurisdiction
(consult an accountant competent to practice in your location), but it may
not be if, say, you deducted the purchase from your taxes one year, and
received the rebate the next year.

Are you asking "Am I within my household item budget for this time-frame?"
If so, you should consider how this purchase/rebate would affect that.

And so on, for other questions.

I don't know (and don't want to know) the full details of your situation,
but unless there were some good reason otherwise, personally I'd treat the
rebate as a credit to the expense.

On Sun, Jun 26, 2016 at 6:27 PM Ruth Morley <[hidden email]> wrote:

> I think this is an accounting question rather than a gnucash question but
> here goes.
>  ordered a household item which I then returned. The original purchase went
> into Expenses:Household and then I got a rebate.
> Now should I put the rebate amount into the expenses:household or should I
> set up a new income category which is for instance Income:Rebates.
> I think the former would make more sense to me but may not be correct.
> Ideas??
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Re: Accounting question

Michael DeBusk-2
In reply to this post by Ruth Morley
On Jun 26, 2016 18:27, "Ruth Morley" <[hidden email]> wrote:

> Now should I put the rebate amount into the expenses:household or should I
> set up a new income category which is for instance Income:Rebates.

Rebates are generally not taxable income, and I don't consider them to be
income at all. They're more like a discount off the purchase price.

As such, they are (in my opinion) better recorded as a credit to the
expense account.

Rebates and refunds are one of the two situations in which I use accrual
methods in my cash-basis books. I have an asset account of type "accounts
receivable" (a/r) for rebates and refunds I'm due. When I buy an item that
has a rebate, I record the purchase normally (credit the payment account
and debit the expense account) for the full amount, and then I record
another transaction in which I credit the expense account and debit the a/r
account for the amount of the rebate.

(Truth be told, I record the rebate transaction when I mail the rebate
form, but I put the date of purchase in the date field.)

When I actually receive the rebate, I debit cash or checking and credit the
a/r account.

I treat tax refunds the same way, recording them as a/r on December 31 of
the year for which I'm filing.
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Re: Accounting question

A.J. Bonnema-2

> I treat tax refunds the same way, recording them as a/r on December 31 of
> the year for which I'm filing.
>
You wouldn't treat tax refunds as (delayed) income? As tax decreases
income, tax refund increases income albeit delayed?

P.S. I might be misunderstanding the term "a/r", taking it to mean you
do not regard this as income.

Kind regards, Guus.
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Re: Accounting question

Michael DeBusk-2
On Jun 27, 2016 04:46, "Guus Bonnema" <[hidden email]> wrote:

> You wouldn't treat tax refunds as (delayed) income? As tax decreases
income, tax refund increases income albeit delayed?

I do not. Tax doesn't decrease income any more than any other expense
decreases income. Expenses decrease assets.

> P.S. I might be misunderstanding the term "a/r", taking it to mean you do
not regard this as income.

Accounts Receivable are asset accounts that track income you've earned but
have not received. Most individuals won't use them, as cash-based
accounting makes more sense for them; Accounts Receivable and Accounts
Payable are used in accrual accounting, which businesses tend to use.
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Re: Accounting question

A.J. Bonnema-2

On 27-6-2016 11:01, Michael DeBusk wrote:
> On Jun 27, 2016 04:46, "Guus Bonnema" <[hidden email]> wrote:
>
>> You wouldn't treat tax refunds as (delayed) income? As tax decreases
> income, tax refund increases income albeit delayed?
>
> I do not. Tax doesn't decrease income any more than any other expense
> decreases income. Expenses decrease assets.

Just trying to understand. If I get a gross amount of 1200 euro salary
for a certain month, pay 200 income tax then I earn a 1000 income:
right? Now, if by the end of the year, the goverments returns 50 euro
tax (for that month) then in retrospect I earned 1050.

I don't see what is wrong with that reasoning and it does imply that tax
decreases income, and tax return increases income .... ?

Why would the tax return not be delayed income?
>> P.S. I might be misunderstanding the term "a/r", taking it to mean you do
> not regard this as income.
>
> Accounts Receivable are asset accounts that track income you've earned but
> have not received. Most individuals won't use them, as cash-based
> accounting makes more sense for them; Accounts Receivable and Accounts
> Payable are used in accrual accounting, which businesses tend to use.

Thanks for the explanation. For me indeed not usually important.

Kind regards, Guus.
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RE: Accounting question

Gary Holtum
>> Just trying to understand. If I get a gross amount of 1200 euro salary
for a certain month, pay 200 income tax then I earn a 1000 income: right? <<

Wrong! If your salary is 1200 then your income is 1200. The government bases
its tax rate on 1200, therefore you have an EXPENSE of 200.

Gary

-----Original Message-----
From: gnucash-user
[mailto:gnucash-user-bounces+diamondhranchqh=[hidden email]] On
Behalf Of Guus Bonnema
Sent: Monday, June 27, 2016 6:39 AM
To: [hidden email]
Subject: Re: Accounting question


On 27-6-2016 11:01, Michael DeBusk wrote:
> On Jun 27, 2016 04:46, "Guus Bonnema" <[hidden email]> wrote:
>
>> You wouldn't treat tax refunds as (delayed) income? As tax decreases
> income, tax refund increases income albeit delayed?
>
> I do not. Tax doesn't decrease income any more than any other expense
> decreases income. Expenses decrease assets.

Just trying to understand. If I get a gross amount of 1200 euro salary for a
certain month, pay 200 income tax then I earn a 1000 income:
right? Now, if by the end of the year, the goverments returns 50 euro tax
(for that month) then in retrospect I earned 1050.

I don't see what is wrong with that reasoning and it does imply that tax
decreases income, and tax return increases income .... ?

Why would the tax return not be delayed income?
>> P.S. I might be misunderstanding the term "a/r", taking it to mean
>> you do
> not regard this as income.
>
> Accounts Receivable are asset accounts that track income you've earned
> but have not received. Most individuals won't use them, as cash-based
> accounting makes more sense for them; Accounts Receivable and Accounts
> Payable are used in accrual accounting, which businesses tend to use.

Thanks for the explanation. For me indeed not usually important.

Kind regards, Guus.
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RE: Accounting question

David Cousens
Hi Gus,

In most cases you pay tax installments from your income in advance against your Tax liability for the year and your full tax liability is not known until the end of the year when your taxable income is usually assessed by your tax office.  one possible way of treating this is to accumulate your advance payments in a liability account  Tax:Installments Paid which acts as a contra account to Tax:AssessedTax , i.e. they both are subaccounts of a liability account Tax: and are summed into that header account. For your monthly income of 1200 euro with 200 euro tax, the monthly transactions would be:

Asset:Bank                                             Db 1000
Liability:Tax:InstallmentsPaid        Db    200
Income                                                                                      Cr 1200

At the end of a 12 month period ( assuming no change in the  salary or tax) the Tax: InstallmentsPaid will have a Db balance of 2400 euro.  If we now assume for example that your assessed tax is 2000 euro for that year ( assuming you have some deductible expenses or tax rebates etc), you could record this as

Liability:Tax : AssessedTax                                              Cr 2000
Expense: TaxPaid                            Db 2000

and when you receive the refund  of 400 euro ( usually at the same time you receive the assessment of tax for the year, you record the refund as

Liability:Tax:InstallmentsPaid                                       Cr 400
Asset:Bank                                           Db 400

( here if you had additional tax to pay over the installments the Db and Cr would be swapped between the accounts)
and the balances in your Liability tax accounts then become (as the debit and credit balances in the sub-accounts sum to a zero balance  recorded here as Db  as a liability account Db balance is a positive balance)

Liability: Tax                                         Db 0                                                      i.e. there is no net tax liability
Liability:Tax:AssessedTax                                            Cr 2000               what your tax office assessed your tax as
Liability:Tax:InstallmentsPaid      Db 2000                                             the 2400 in installments paid less the 400 refund.

While this may seem a bit complex, it does ensure you have a complete record at all times of the tax owing installments paid, refunds received etc. If your tax system has some differences from the system assumed above , there may be additional or redundant steps. It gets around the problem of having to have credit transactions to the Expense:tax paid at the end of the year when the assessment is received and you only expense the total amount when the assessment is received. It also treats the situation where your assessment does not arrive until sometime into the new tax year in which case you simply carry the liability accounts forward into the next year. Tax systems are highly legislation and jurisdiction dependent, so if you are using this for tax assessment purposes , it may be beneficial to get local professional advice as the above scheme is appropriate for the tax system where I live.

Cheers
DaveC49

 
David Cousens
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Re: Accounting question

Dean Gibson-3
In reply to this post by Buddha Buck
On 2016-06-26 16:49, Buddha Buck wrote:
> ...
>
> But... what questions are you asking of your accounting system?
>

Exactly.  Presumably one is tracking expenses, and rebates are
integrally tied to a particular expense.  Often the decision to make a
particular purchase is based on the consideration of receiving the
rebate, so most people (outside of accounting) consider that the price
they paid to be offset by the rebate.  Thus, the rebate is an adjustment
to a particular expense, and should be so recorded.  Of course, I record
the pending receipt of the rebate in my "rebates receivables" asset account.

As for income taxes (not mentioned by the OP), I mark any income tax
withheld as a pre-paid taxes asset account.  Since you don't know the
AMOUNT of your tax liability, you shouldn't record it as one, in my
opinion.  Recording it as a pre-paid liability seems artificial to me.  
When I finally compute my taxes, I record the total tax amount as an
expense, offset against pre-paid taxes.  The difference is either a
payment from, or a refund to, my cash account.
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Re: Accounting question

A.J. Bonnema-2
In reply to this post by David Cousens
On 06/27/2016 02:52 PM, DaveC49 wrote:

> Hi Gus,
>
> In most cases you pay tax installments from your income in advance against
> your Tax liability for the year and your full tax liability is not known
> until the end of the year when your taxable income is usually assessed by
> your tax office.  one possible way of treating this is to accumulate your
> advance payments in a liability account  Tax:Installments Paid which acts as
> a contra account to Tax:AssessedTax , i.e. they both are subaccounts of a
> liability account Tax: and are summed into that header account. For your
> monthly income of 1200 euro with 200 euro tax, the monthly transactions
> would be:
>
> Asset:Bank                                             Db 1000
> Liability:Tax:InstallmentsPaid        Db    200
> Income
> Cr 1200
>
> At the end of a 12 month period ( assuming no change in the  salary or tax)
> the Tax: InstallmentsPaid will have a Db balance of 2400 euro.  If we now
> assume for example that your assessed tax is 2000 euro for that year (
> assuming you have some deductible expenses or tax rebates etc), you could
> record this as
>
> Liability:Tax : AssessedTax                                              Cr
> 2000
> Expense: TaxPaid                            Db 2000
>
> and when you receive the refund  of 400 euro ( usually at the same time you
> receive the assessment of tax for the year, you record the refund as
>
> Liability:Tax:InstallmentsPaid                                       Cr 400
> Asset:Bank                                           Db 400
>
> ( here if you had additional tax to pay over the installments the Db and Cr
> would be swapped between the accounts)
> and the balances in your Liability tax accounts then become (as the debit
> and credit balances in the sub-accounts sum to a zero balance  recorded here
> as Db  as a liability account Db balance is a positive balance)
>
> Liability: Tax                                         Db 0
> i.e. there is no net tax liability
> Liability:Tax:AssessedTax                                            Cr 2000
> what your tax office assessed your tax as
> Liability:Tax:InstallmentsPaid      Db 2000
> the 2400 in installments paid less the 400 refund.
>
> While this may seem a bit complex, it does ensure you have a complete record
> at all times of the tax owing installments paid, refunds received etc. If
> your tax system has some differences from the system assumed above , there
> may be additional or redundant steps. It gets around the problem of having
> to have credit transactions to the Expense:tax paid at the end of the year
> when the assessment is received and you only expense the total amount when
> the assessment is received. It also treats the situation where your
> assessment does not arrive until sometime into the new tax year in which
> case you simply carry the liability accounts forward into the next year. Tax
> systems are highly legislation and jurisdiction dependent, so if you are
> using this for tax assessment purposes , it may be beneficial to get local
> professional advice as the above scheme is appropriate for the tax system
> where I live.
>
> Cheers
> DaveC49
>
>  
Thank you, Dave. A very clear explanation. I can use your setup for our
tax system.

P.S. Up until now I just ignored tax paid, and regarded tax return as
income. It. works to a point, but this is clearly better.

Again, thank you your clear answer!

Kind regards, Guus.
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Re: Accounting question

David Cousens
In reply to this post by Dean Gibson-3
Hi Dean,

A liability is just an expected future expense or call on your assets that you are obligated to pay. As you generally know what tax bracket you fall in, it is at least usually possible to estimate reasonably closely your tax liability as it accumulates rather than just at the EOFY. In practice most tax authorities have pay as you go schemes which in effect are doing this for you ( and earning them investment funds). It is a common accounting practice to estimate liabilities which accrue over a period but are not due until some future time as it allows you to set aside funds or at least be aware of the future cash flow needs rather than getting a huge surprise when the tax bill comes in.

Obviously recording the prepayments as an asset works equally as well as far as recording the actual transactions and the end result works out the same. My reason for using a liability account is just that the prepayments are no longer in your control and you are not receiving any direct economic benefit from holding them as an asset, as any income earned by them accumulates to the government not to you.

In the case where the tax office doesn't collect the payments as you earn them, but you accumulate funds in a bank account to meet that future liability, then the case for using an asset account is much clearer in accounting terms.

In the end as long as whatever approach you use allows you to be able to predict and meet your future cash needs, then it has met your objectives in keeping financial records.
Cheers

David
David Cousens
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Re: Accounting question

Michael DeBusk-2
In reply to this post by A.J. Bonnema-2
On Jun 27, 2016 06:40, "Guus Bonnema" <[hidden email]> wrote:

> Just trying to understand. If I get a gross amount of 1200 euro salary
for a certain month, pay 200 income tax then I earn a 1000 income: right?

No, sir. You earn 1200 euro income. The fact that you never actually get to
hold all 1200 of them in your hands before paying 200 of them to the taxing
authorities doesn't change that.

> Why would the tax return not be delayed income?

Because the income was not delayed; the receiving of it was.

Taxes are expenses, just like gas and electricity and mortgage interest.
There is nothing special about them from an accounting perspective. People
so often think of them as something unusual because very few people
ACTUALLY PAY THEM, i.e., get their full pay and write a check to the tax
man every week. Most people have jobs, and their employer withholds
estimated tax from the paychecks and does the actual check-writing.

It's the entrepreneurs among us who understand what it actually FEELS like
to pay taxes. I've never heard a small business owner brag about "sticking
it to the government" by getting a large refund check. Imagine paying an
extra hundred euro a month on your telephone bill and then claiming you
"put one over on" the phone company when they sent you your 1200 back at
the end of the year.

But I digress.
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