When You Are NOT on the T.I.P.P.
Just like I wrote in my previous post, Prepaid Property Taxes: T.I.P.P. and Journal Entries .. the reason one might adjustment the business and property tax accounts on a monthly basis, or at the year-end .. is to make sure that the expense is correct for the fiscal period. I provided an example what to do when you are on a T.I.P. Plan that might be over 10 months .. But, what if you aren’t on the tax instalment payment plan? Should you be adjusting your expense accounts anyway? Or Leave it alone as an expense when paid?
I would adjust the expense
Generally, at least here in Manitoba .. property taxes are due either on June 30th (city) or October 31st (rural) .. and business taxes are due on May 31st. A lot of businesses just choose to pay it in full on or before the due date. When I am preparing monthly financial statements for clients, I will ACCRUE the property taxes on a monthly basis, because often if I don’t .. each month there will show an unusually higher amount of profit .. and then in the month that property taxes are paid, there might be a loss.
Using my examples from my previous post .. let’s assume:
* 2005 Property Taxes were $18,000
* 2006 Property Taxes are $24,000
When it comes time to prepare the January 2006 monthly financial statements .. I don’t know what the new year’s taxes will be – however, I do know what last years was. I will accrue the following amount:
* 18,000/12 = $1,500/month (debit expense, credit accrued A/P)
By May 2006 .. my accrual will have (5 x 1500 = $7,500) year to date. In June, when the company pays the annual property taxes in full .. this would be the journal entry that I would make.
Now – if I were preparing monthly CASH FLOW statements, it wouldn’t matter. But, as you know – cash flow is not the same as net income – and I prefer to ‘normalize’ the net profit accordingly.
|DR. Accrued A/P||
|DR. Propery Tax Expense||
|DR. Prepaid Expenses||
At June 30, 2006 = the property taxes expense should be (24,000 x 6/12 = 12,000). I would adjust the year to date to agree to this figure (12,000 – 7,500 = 4,500 additional expense in the month of June)
The prepaid expense of $12,000 would be adjusted between July and December at a rate of $2,000 per month. It should be noted, that this is following my “Balance Sheet Approach” method .. adjusting the Balance Sheet account ‘Prepaid Expenses’ what it should be at June 30th. I would not adjust it to the difference that wasn’t accrued January thru May ($24,000 – $7,500 = $16,500). I hope that clears that up.