How to do journal entries for taxes payable?

Cameron

If I made some revenue and I want to start allocating a % of that to a taxes account. What's the best way to do the journal entries to build up the savings so I can pay them quarterly?

Gabriel_Krozkin

Hi @Cameron
Congratulations on the revenue!

a).- I am including the response below, assuming that you are referring to Income Taxes in this case follow the steps 1 to 3.
b).- If you are referring to "Sales" taxes, just follow steps 2 and 3.

1).- You want to create an "accrual" (basically "take out" of profit and build a provision for income taxes to be paid in the future).
You can create a manual Journal entry that would be:

Account DEBIT CREDIT
Income Tax (Expense) 100
Income Tax Payable (Liability) 100

Result: In your P&L now will show the bottom line, the revenue minus this "Income Taxes" amount of estimated taxes, therefore showing the net estimated profit after taxes.
This will "build" the provision, but the monies will continue to be in the same bank account as they currently are.

2).- If you want to actually "build" an account with cash $ in it to be able to afford to pay the taxes quarterly. You can open a new bank account (just for taxes) and post the following entry every time that you transfer the funds to "build" the balance in the Bank account that you would like to pay the taxes from:

You can create a manual Journal entry that would be:

Account DEBIT CREDIT
Bank Account (that you utilize to pay taxes) 100
Bank Account (every day) 100

3).- By the time that you actually need to pay the quarterly Taxes: the entry would be:

You can create a manual Journal entry that would be:

Account DEBIT CREDIT
Income Tax Payable or Sales Tax (Liability) 100
Bank Account (that you utilize to pay taxes) 100

Hope this helps, or if anything else, let me know.

Sincerely,

Gabriel.