@Bow, I'm glad the steps worked for you. If you're setting funds aside for taxes, I would do it as a transfer from your new Tax Equity Account to a Short Term Liability account. That takes the money out of your sight, so to speak and you won't need a new bank account.
Steps to set up Liability Account and transfer money into it
1. Accounting > Chart of Accounts > Liabilities and Credit Cards > Other Short Term Liability
2. Add a New Account > 'Income Tax Payable' (for example)
3. To transfer the full amount owing, go to: Accounting > Transactions > More > Add journal transaction
Expense: select your new Tax Equity account that you set up in the earlier post > enter the total amount of taxes owing ($1200)
Income: select your new Short term liability account 'Income Tax Payable' that you just set up > enter the total amount of taxes owing ($1200)
Your Balance Sheet Details tab will show the amount under Liabilities - you should see your new account there and your Total Equity should reduce by $1200. (Your P&L shouldn't change) Steps to pay your 1st tax installment:
Accounting > Transactions > Add expense
Account: Select your bank account
Enter the payment amount ($600)
Category: Select your Short Term Liability account
Save
This will reduce the Short Term Liability amount in your Balance Sheet but your Total Equity will remain unchanged because you've already 'spent' the money, so to speak. Repeat for 2nd payment.
Once you're set up, I think this will take a minute to do for each payment. The steps look more complex than the actual transaction is.
Good luck! It's good you're keeping this money aside - I'll keep you out of trouble with the taxman :-)
Sandy
I've tried the steps above, but I'm afraid I've gotten myself in a bit of a muddle.
I've gone back and simplified my Transactions (see attached screenshot) to keep things more manageable. I then did tried to go through your steps again.
I created the Short Term Liability account as outlined in Steps 1 and 2:
(1. Accounting > Chart of Accounts > Liabilities and Credit Cards > Other Short Term Liability 2. Add a New Account > 'Income Tax Payable')
When I got to Step 3, I did the following (which I hope is right):
Make a new journal entry (Transactions > More > Add journal entry)
Select my new tax equity account from my previous post (which I called HMRC Tax Holding as I'm using it to hold my tax payable) as the Debits entry and enter the amount as £100. (I'm simplifying the amounts so I can read things more easily)
Select HMRC Tax Payable (my new short-term liability account I created in Steps 1 and 2 of your post above) as the Credits entry and enter the amount as £100.
I hope this is correct. The problem is, I've not actually moved any money out of my company account into the HMRC Tax Holding account as far as any Wave transactions are concerned, so haven't I in effect just created money that wasn't there? This is where accounting really eludes me. I thought I would have to transfer money out of my company account (a transaction of some type) into the HMRC Tax Holding account so that there is actually money there to complete Step 3 (classing the £100 in tax payable as a short-term liability).
I'm attaching my P&L and Balance Sheet reports so that it's clear what I can see.
I can't help but feel I've missed something here and so the sums aren't coming out correctly.
Basically, before I made the journal transaction it said my company account had £535.00 in it.
I then made a journal transaction for £100 (the tax owed to the government) that should be set aside to pay taxes, but this hasn't decreased the amount of money in my company account, because I've attributed the new tax holding account (equity account) with having £100, but without actually transferring any money into it. That seems wrong to me.
Thanks in advance for your help. I'm hoping we're just a few steps away from resolving this and then we can all breathe a sigh of relief!
Hi Bow,
I think I understand what you've done but I'm not sure you've gained anything. What it seems you've done is to set up a fake bank account 'HMRC' and you want to move money out of your company into it. However, the P&L and Balance Sheet for your company don't care what bank account you store your money in - they just account for it. So, all the accounts listed in your company's Wave profile will impact your company's P&L and Balance Sheet.
I think you'd need to set up another company, so to speak, with it's own profile and Cash and Bank Account if you want to actually withdraw the tax money from your company and move it to that account - I'm not actually sure if that's possible in Wave or desirable from an accounting perspective.
For myself, I created my 'HMRC Tax Holding' not as a separate Cash and Bank account as you did, but as an Equity account. Doing this ensures that my Balance Sheet is reduced and the reduction is accounted for. Then setting up the Short Term liability gives me a place to 'store' what you owe.
If you're concerned about spending that amount, you should always refer to your Balance Statement Total Equity amount as it accounts for revenue, expenses, and liabilities. The amount listed in your Transactions page is just what's currently in your bank account(s), so not a good number to spend against.
I think I understand now. It's really just a case of putting the money for the taxes I will have to pay next year in a virtual "side drawer" of my existing bank account, right?
Here is what I've done just now:
I've already created a short-term liability called HMRC Tax Payable, so no need to create any other accounts or entries
I start a journal entry (Transactions > More > Add journal entry) and call it HMRC Taxes 2020. I put in the amount (£100) and under Debits select my HMRC Tax Payable short-term liability und under Credits I select my company bank account, JBow Company Account and save.
I then look at my P&L report and it shows Net Profit is still £535.
I then look at my Balance Sheet. Before the journal entry it was £160.50 and now, after moving the tax money (£100) to my short-term liability account "HMRC Tax Payable" it is still £160.50, but there is an entry under Current Liabilities for HMRC Tax Payable -£100.00.
Does this now sound right? I hope so as I'm sure you've long since lost the will to carry on with this.
If nothing else, I'm sure this must make things clear enough for my accountant so that she will have no problems in doing my books and filing my tax return and that HMRC can clearly see that I have done my best to thoroughly track and account for all my invoices, expenses and tax responsibilities.
All the best and have a great rest of the week,
Bow
Hi Bow, something's not quite right but you may have recorded it in such a way that you're accountant will understand. Your Short Term Liability, in your Balance Sheet, should be +$ not -$.
You shouldn't debit or credit your bank account unless you're actually doing those transactions, otherwise your bank statement won't reconcile with your books. Instead, you should be setting up a Tax account under your Equity (tab) accounts. Essentially, you move money into Short Term Liability (from your Tax Equity account). Your Tax Equity will be -$100 and your Short Term Liability will be +$100, Then when you pay it from your Short Term Liability, that account will then have $100 less in it and your Tax Equity will stay the same. It's a double transaction but that's always been the problem with this gap.
@SandyL I think this is the problem: I don't understand what you mean when you say my Tax Equity account.
I thought at first you meant the second bank account I created (I called it HMRC Tax Holding). This is the account I set up so I could just move my tax owed out of my business account and ring fence it so that I knew it was "off the books" and safely kept where I couldn't spend it. But now I think you're talking about something else, but I'm not sure what that is.
I've changed the places on those entries for the journal entry (swapped their places as to which is credit and which is debit) and I'm attaching it here. Does it all look right now?
I'm sorry, Sandy, for all the hassle. If this doesn't sort it out, I'll just agree something with my accountant. You've suffered enough.
The account I'm referring to needs to be set up in your Equity account (it has its own tab in Accounting - see Acct attachment) with a title like "Federal Tax Paid". Move money from it to your Short Term Liability, then pay from there. See Tax attachment for how your Balance Sheet should look. Once you make your payment from Short Term Liability, the $100 will not display there anymore, as it's no longer a liability.
So, moving the money from Federal Tax Paid allows you to track this payment - if you show it just as a Drawing, it looks like you've removed money from your Equity for personal use, which in Canada is taxable at the personal income level.
I'm very happy to help - no worries. I've received lots of help from others online, so am happy to pay it forward :-)
Cheers,
Sandy!
P.S.
If Wave allowed us to charge this as a post-tax expense, none of this would be necessary. It would just show up on your P&L as a non-operational expense:
Profit & Loss Statement
Total Revenue $100,000
Cost of Goods Sold ($ 20,000) Gross Profit $ 80,000
@Bowjest Typically you would also create a balance sheet account called, say, HMRC A/c.
So transfers between Main a/c and Tax a/c would just be a transfer. £1200
Payment-on-account to HMRC would be Bank outflow (Tax a/c), allocated to HMRC A/c £600
Once tax bill is calculated you post a Jnl (Dr Tax, Cr HMRC A/c) £1200
Finally when you pay the balance this is also Bank outflow (Tax a/c), allocated to HMRC A/c £600
I had a conversation with my accountant and she said the same as you: As long as I'm consistent in how I track things and I make her aware of what I'm doing and why, she can handle the rest.
@RichA said: @Bowjest Typically you would also create a balance sheet account called, say, HMRC A/c.
So transfers between Main a/c and Tax a/c would just be a transfer. £1200
Payment-on-account to HMRC would be Bank outflow (Tax a/c), allocated to HMRC A/c £600
Once tax bill is calculated you post a Jnl (Dr Tax, Cr HMRC A/c) £1200
Finally when you pay the balance this is also Bank outflow (Tax a/c), allocated to HMRC A/c £600
@RichA Thanks for that, Rich. I'll look into that in more detail.
@RichA said: @Bowjest Typically you would also create a balance sheet account called, say, HMRC A/c.
So transfers between Main a/c and Tax a/c would just be a transfer. £1200
Payment-on-account to HMRC would be Bank outflow (Tax a/c), allocated to HMRC A/c £600
Once tax bill is calculated you post a Jnl (Dr Tax, Cr HMRC A/c) £1200
Finally when you pay the balance this is also Bank outflow (Tax a/c), allocated to HMRC A/c £600
@RichA Sorry, Rich. I've gone back just now and had a look at this in my Wave setup, but I don't really understand where I should create this balance sheet account (HMRC A/c for example). Is this created as a sub account in some way for the Tax Holding account that I use to park/ring fence the money I put aside to pay my annual taxes? Or is it an entry under short-term or long-term liabilities? I really don't know much of anything about accounting.
If it's too tedious to go through the steps, I completely understand, but if you wouldn't mind walking me through how you would set this up and use it, I would appreciate it.
@Bowjest said: @RichA Sorry, Rich. I've gone back just now and had a look at this in my Wave setup, but I don't really understand where I should create this balance sheet account (HMRC A/c for example). Is this created as a sub account in some way for the Tax Holding account that I use to park/ring fence the money I put aside to pay my annual taxes? Or is it an entry under short-term or long-term liabilities? I really don't know much of anything about accounting.
@Bowjest - it is not a bank account; it is a short-term asset or prepayment sub account **. (i.e. you have paid them £600 which is a payment on account)
[** a bank account is an account at the bank that you control; this is an account that holds a record of money paid on account to HMRC. It is an asset as it would be repayable by HMRC should you eventually submit a £nil tax return].
Comments
@Bow, I'm glad the steps worked for you. If you're setting funds aside for taxes, I would do it as a transfer from your new Tax Equity Account to a Short Term Liability account. That takes the money out of your sight, so to speak and you won't need a new bank account.
Steps to set up Liability Account and transfer money into it
1. Accounting > Chart of Accounts > Liabilities and Credit Cards > Other Short Term Liability
2. Add a New Account > 'Income Tax Payable' (for example)
3. To transfer the full amount owing, go to: Accounting > Transactions > More > Add journal transaction
Your Balance Sheet Details tab will show the amount under Liabilities - you should see your new account there and your Total Equity should reduce by $1200. (Your P&L shouldn't change)
Steps to pay your 1st tax installment:
This will reduce the Short Term Liability amount in your Balance Sheet but your Total Equity will remain unchanged because you've already 'spent' the money, so to speak. Repeat for 2nd payment.
Once you're set up, I think this will take a minute to do for each payment. The steps look more complex than the actual transaction is.
Good luck! It's good you're keeping this money aside - I'll keep you out of trouble with the taxman :-)
Sandy
@SandyL You're a lifesaver. Thank you so much for taking the time to lay this out for me.
I'll give this a try today. I'd really like to move everything over from my current software to Wave.
I hope you have a really nice weekend,
Bow
@SandyL Hi Sandy,
I've tried the steps above, but I'm afraid I've gotten myself in a bit of a muddle.
I've gone back and simplified my Transactions (see attached screenshot) to keep things more manageable. I then did tried to go through your steps again.
I created the Short Term Liability account as outlined in Steps 1 and 2:
(1. Accounting > Chart of Accounts > Liabilities and Credit Cards > Other Short Term Liability 2. Add a New Account > 'Income Tax Payable')
When I got to Step 3, I did the following (which I hope is right):
I hope this is correct. The problem is, I've not actually moved any money out of my company account into the HMRC Tax Holding account as far as any Wave transactions are concerned, so haven't I in effect just created money that wasn't there? This is where accounting really eludes me. I thought I would have to transfer money out of my company account (a transaction of some type) into the HMRC Tax Holding account so that there is actually money there to complete Step 3 (classing the £100 in tax payable as a short-term liability).
I'm attaching my P&L and Balance Sheet reports so that it's clear what I can see.
I can't help but feel I've missed something here and so the sums aren't coming out correctly.
Basically, before I made the journal transaction it said my company account had £535.00 in it.
I then made a journal transaction for £100 (the tax owed to the government) that should be set aside to pay taxes, but this hasn't decreased the amount of money in my company account, because I've attributed the new tax holding account (equity account) with having £100, but without actually transferring any money into it. That seems wrong to me.
Thanks in advance for your help. I'm hoping we're just a few steps away from resolving this and then we can all breathe a sigh of relief!
Best,
Bow
Hi Bow,
I think I understand what you've done but I'm not sure you've gained anything. What it seems you've done is to set up a fake bank account 'HMRC' and you want to move money out of your company into it. However, the P&L and Balance Sheet for your company don't care what bank account you store your money in - they just account for it. So, all the accounts listed in your company's Wave profile will impact your company's P&L and Balance Sheet.
I think you'd need to set up another company, so to speak, with it's own profile and Cash and Bank Account if you want to actually withdraw the tax money from your company and move it to that account - I'm not actually sure if that's possible in Wave or desirable from an accounting perspective.
For myself, I created my 'HMRC Tax Holding' not as a separate Cash and Bank account as you did, but as an Equity account. Doing this ensures that my Balance Sheet is reduced and the reduction is accounted for. Then setting up the Short Term liability gives me a place to 'store' what you owe.
If you're concerned about spending that amount, you should always refer to your Balance Statement Total Equity amount as it accounts for revenue, expenses, and liabilities. The amount listed in your Transactions page is just what's currently in your bank account(s), so not a good number to spend against.
I hope this helps!
Hi @SandyL ,
I think I understand now. It's really just a case of putting the money for the taxes I will have to pay next year in a virtual "side drawer" of my existing bank account, right?
Here is what I've done just now:
Does this now sound right? I hope so as I'm sure you've long since lost the will to carry on with this.
If nothing else, I'm sure this must make things clear enough for my accountant so that she will have no problems in doing my books and filing my tax return and that HMRC can clearly see that I have done my best to thoroughly track and account for all my invoices, expenses and tax responsibilities.
All the best and have a great rest of the week,
Bow
Hi Bow, something's not quite right but you may have recorded it in such a way that you're accountant will understand. Your Short Term Liability, in your Balance Sheet, should be +$ not -$.
You shouldn't debit or credit your bank account unless you're actually doing those transactions, otherwise your bank statement won't reconcile with your books. Instead, you should be setting up a Tax account under your Equity (tab) accounts. Essentially, you move money into Short Term Liability (from your Tax Equity account). Your Tax Equity will be -$100 and your Short Term Liability will be +$100, Then when you pay it from your Short Term Liability, that account will then have $100 less in it and your Tax Equity will stay the same. It's a double transaction but that's always been the problem with this gap.
You're getting close!
@SandyL I think this is the problem: I don't understand what you mean when you say my Tax Equity account.
I thought at first you meant the second bank account I created (I called it HMRC Tax Holding). This is the account I set up so I could just move my tax owed out of my business account and ring fence it so that I knew it was "off the books" and safely kept where I couldn't spend it. But now I think you're talking about something else, but I'm not sure what that is.
I've changed the places on those entries for the journal entry (swapped their places as to which is credit and which is debit) and I'm attaching it here. Does it all look right now?
I'm sorry, Sandy, for all the hassle. If this doesn't sort it out, I'll just agree something with my accountant. You've suffered enough.
All the best,
Bow
Hi Bow,
The account I'm referring to needs to be set up in your Equity account (it has its own tab in Accounting - see Acct attachment) with a title like "Federal Tax Paid". Move money from it to your Short Term Liability, then pay from there. See Tax attachment for how your Balance Sheet should look. Once you make your payment from Short Term Liability, the $100 will not display there anymore, as it's no longer a liability.
So, moving the money from Federal Tax Paid allows you to track this payment - if you show it just as a Drawing, it looks like you've removed money from your Equity for personal use, which in Canada is taxable at the personal income level.
I'm very happy to help - no worries. I've received lots of help from others online, so am happy to pay it forward :-)
Cheers,
Sandy!
P.S.
If Wave allowed us to charge this as a post-tax expense, none of this would be necessary. It would just show up on your P&L as a non-operational expense:
Profit & Loss Statement
Total Revenue $100,000
Cost of Goods Sold ($ 20,000)
Gross Profit $ 80,000
Operating Expenses
Salaries $10,000
Rent $10,000
Utilities $ 5,000
Depreciation $ 5,000
Total Operating Expenses ($ 30,000)
Operating Profit (EBIT) $ 50,000
Interest Expense ($ 10,000)
Income before taxes (EBT) $ 40,000
Taxes ($ 10,000)
Net Income $ 30,000
@Bowjest Typically you would also create a balance sheet account called, say, HMRC A/c.
So transfers between Main a/c and Tax a/c would just be a transfer. £1200
Payment-on-account to HMRC would be Bank outflow (Tax a/c), allocated to HMRC A/c £600
Once tax bill is calculated you post a Jnl (Dr Tax, Cr HMRC A/c) £1200
Finally when you pay the balance this is also Bank outflow (Tax a/c), allocated to HMRC A/c £600
@SandyL Thanks. I'll give that a try.
I had a conversation with my accountant and she said the same as you: As long as I'm consistent in how I track things and I make her aware of what I'm doing and why, she can handle the rest.
What a relief.
All the best,
Bow
@RichA Thanks for that, Rich. I'll look into that in more detail.
Cheers,
Bow
@RichA Sorry, Rich. I've gone back just now and had a look at this in my Wave setup, but I don't really understand where I should create this balance sheet account (HMRC A/c for example). Is this created as a sub account in some way for the Tax Holding account that I use to park/ring fence the money I put aside to pay my annual taxes? Or is it an entry under short-term or long-term liabilities? I really don't know much of anything about accounting.
If it's too tedious to go through the steps, I completely understand, but if you wouldn't mind walking me through how you would set this up and use it, I would appreciate it.
Many thanks,
Bow
@Bowjest - it is not a bank account; it is a short-term asset or prepayment sub account **. (i.e. you have paid them £600 which is a payment on account)
[** a bank account is an account at the bank that you control; this is an account that holds a record of money paid on account to HMRC. It is an asset as it would be repayable by HMRC should you eventually submit a £nil tax return].