Business owner (sole trader) or company provisional tax (business PAYG)
A similar process occur annually when income tax is paid.
Posting each component to an appropriate account makes sense to me rather than posting the total then using a journal entry to divide it up.
I’m not aware of legal requirements which prevent do it this way, so will have to take your word for that some jurisdiction do not allow doing via my first choice.
There are, in fact, jurisdictions where accounting records for proprietorships and partnerships make no mention of provision for or payment of income tax. Instead, profits, losses, and all relevant other amounts are distributed to and reported on tax filings of owners.
If everything has been accounted for correctly the first 2 BS accounts will be cleared as at the date of your BAS return.
The 3rd BS account will be increased (asset).
Just because they make no mention of those provisions that doesn’t mean a proprietorship or partnership can’t make such provisions within their management accounts, it just means that those provisions are eliminated for tax reporting purposes. Management reporting v’s Taxation reporting.
Let me be clearer. I am referring to jurisdictions where proprietorships and partnerships pay no income tax directly. Therefore, it would be inaccurate, in the accounts of the business, to make provision for a tax to which the business is not subject and will never pay. Any such provision, whether included in tax reporting or not, would misrepresent position and performance of the business.
Further, because the income passed through to the proprietor or partners is taxed at their rates, not a rate determinable by the business or related to its net profit in any fashion, there would be no way to calculate or estimate what an appropriate provision might be.
So there would be no purpose, for management reporting or any other reason, to make such provision for non-existent taxes. No accountant would recommend it. And it would all have to be undone before the books could be closed out for a tax period so income could be correctly allocated to the proprietor or partners.
Let me be much clearer - your entire post is misleading on so many levels.
Just because the proprietorships or partnerships don’t pay income tax directly doesn’t make it inaccurate for the business accounts to reflect the impact that those “personal” taxes may have on the business. Such provisions, where applicable, would in fact improve the representation of the business’s cash position.
For example, take a business which has a bank balance of 30,000 and the owner is liable for “personal” taxes of 10,000 which when due for payment will be withdrawn from the business via drawings. Now it is totally appropriate for the business accounts to reflect that future cashflow commitment via a liability provision - so the business owner is fully informed as to the business’s TRUE cash position.
However, if the taxes are going to be paid from a non-business source then you wouldn’t create the provision as it wouldn’t be applicable - horses for courses.
Utterly wrong. When the business owner does their “personal” tax filings they will probably be able to calculate or estimate their tax obligations and that becomes the appropriate provision.
Please re-read the example above. In fact there are also other situations where a owner may wish to create liability provisions so as to highlight future cashflow demands so that they don’t overspend. Management accounting is all about keeping the business manager fully informed and not having undisclosed off balance sheet commitments.
That is very outdated, as many accountants do recommend for the reasons explained above.
So many business fail in their first years because of poor cashflow management. That is why cash basis accounting is so dangerous, the owner, when looking at the Summary tab bank account balance doesn’t see the hidden liabilities under the Suppliers tab unless they are disciplined to do so.
Another one of your classic red herrings. The provisions are balance sheet accounts and as such they have absolutely no impact on the P&L, therefore the income can “be correctly allocated to the proprietor or partners”. Besides that, these tax provisions are generally self cleansing (created and paid out) in between financial year end dates so they generally don’t even exist at any actual year end date.
Because there are none (legal restrictions) in any jurisdiction. Just because a jurisdiction makes no mention of allowing such provisions, doesn’t mean that they can’t occur.