P&L Statement & Taxes for prior years?

If you use the "accural" method of accounting should payments for prior years taxes be included as a debit in the current year's P&L statement? E.g. In Feb 2005 a payment was made for a corporation's 2004 taxes for $100K Should that 100K debit be in included in 2004's P&L statement or

2005's?

In my circumstance it's a small C corp and we use a P&L statement generated by quickbooks to get a status snapshot of operations It seems to include these types as tax payments in the year they are paid. This causes the P&L statement not to reflect the current years operations (unless you add back the tax payment to the bottom line - net income number).

If this is correct then doesn't this allow corporations a path to manipulate earnings by, for example, underpaying estimated taxes so that the current years final earnings figures are better?

nearly_blind

Reply to
nearly_blind
Loading thread data ...

Payment of taxes should not be included in the P&L. At year-end you should accrue the estimated taxes (Debit income tax expense, Credit tax payable liability). Generally you reverse accruals in the following period, but don't reverse this one. Charge your payments to the liability account, not to the expense account.

It is indeed possible to manipulate earnings by over- or under-accruing the tax liability. You should not do this - you should estimate the taxes as accurately as possible.

Knowledgeable readers pay more attention to pre-tax income than to after-tax income, and also have sufficient knowledge to detect tax expense that is significantly inconsistent with pre-tax income in ordinary circumstances.

Accruals are one of the simplest ways to manipulate income - taxes, other expenses, revenue, all can be over- or under-accrued. Ethical accountants don't do this, they accrue as accurately as possible and reasonable.

Reply to
!-!

wrote

If you accrued the taxes in the prior year you would have shown the expense and teh corresponding liability.

When paid, you only need to debit the liability.

Again, if you accrued the taxes, the expense showed up last year, and a liability should be on the books for the current year (until paid).

On an accrual basis you should have recorded these in the prior year (for the income statement) and they currently reside on the balance sheet as a liability.

True to some extent. The notes (if any) should advise the user of the accounting method, and any items that should be disclosed to the user to make them aware of anything that would skew the financials from it's true picture.

Reply to
Paul A. Thomas

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.