Edmonton Bookkeeping | Understanding Tax Payable And Tax Expense Accounts
Entrepreneurs must understand the difference between tax payable and tax expense accounts on their financial statements prepared by Edmonton bookkeeping. The reason it is important is because entrepreneurs typically use financial statements to make big important financial decisions in their business. They will decide whether to purchase assets, hire or lay off people and how much money they have to pay themselves. If entrepreneurs are making these decisions on incorrect financial statements, they can end up making poor financial decisions that may impact their business. Since 50% of all business owners go out of business within 5 years, and 29% of those failed entrepreneurs say the reason why they failed was that they ran out of money, ensuring financial statements are as error-free as possible before making decisions with them can significantly impact business owners and their finances.
To understand what these accounts are on their financial statements, business owners should understand the difference between the two. According to Edmonton bookkeeping, a tax expense account is the accounts where business owners’ taxes are indicated. The only entry that is going to happen on this expense account throughout the entire year is at the corporate year-end when an entrepreneurís accountant is going to make an entry into this account on all of the taxes that a business owner owes. As a business owner pays their various taxes, this balance decreases.
A tax payable account according to Edmonton bookkeeping, are all of the various tax accounts that a business has on their financial statement and every time a business owner pays a certain tax, and entry is made into the correct payable account. Since there are five various payable accounts, business owners should familiarize themselves with what the various accounts are, and how much should be going into those accounts and how often.
Business owners will see that there is a federal tax payable account, where all of the federal taxes that a business owner pays will be noted in that account. Business owners should note that in all the other provinces, the federal government also collects the provincial taxes and then disburses them to the province on that the half of the business owner, but in Alberta that is not the case. Therefore, a business owner should see that there is a provincial tax payable account, and every time a business owner makes a payment to Alberta finance, and entry should be made into that account. There is the GST payable account, and however often a business owner pays there GST, and entry will show up here. Finally, there is the payroll withholding account. Every time a business owner runs payroll and gets source deductions off of their employee’s checks including income tax, CPP and EI and entry will be made here. Also, business owners are responsible for paying 1.4% CPP in addition to what they have taken off their employee’s checks, and that also needs to be noted in this account.
The average Canadian pays 43% of their income in a variety of taxes including income tax, CPP, EI, GST and fuel tax to name a few according to Edmonton bookkeeping. The remaining amount of money that Canadians have goes towards their necessities. Since taxes make up a significant portion of Canadians and Canadian business owners’ lives, business owners need to be very vigilant in reviewing their financial statements for errors in the different tax accounts. The reason for this is because there are so many tax accounts, and it is extremely easy for mistakes to happen. For business owners to have the most correct financial statements possible, they should understand the difference between all of the various tax accounts.
When a business owner gets assessed tax at their fiscal year-end, their accountant will make an entry into their tax expense account on their financial statements. Edmonton bookkeeping says that this amount is the only time and entry that should be made into this account, and it should be all of the taxes that a business owner is assessed. If an entrepreneur sees that there is an entry made in this account at any other time by any other person, that is typically an error.
Business owners also need to understand that there are tax payable accounts, for each of the taxes that need to be paid in their business. Those are federal tax, provincial tax, GST and payroll tax. By reviewing and understanding all of these various tax accounts, and how much each of those entries should be and how often entries should be made, business owners can watch for errors much easier according to Edmonton bookkeeping.
Business owners should be mindful that they should never see any tax, payroll or GST amounts in their accounts payable on their financial statements the reason for this is because it has already been noted on their financial statement in their tax expense account. If it is listed in the accounts payable, Edmonton bookkeeping says that it will be double indicated on the financial statements which can cause errors.
Entrepreneurs should also understand that their profits should hire then corporate tax installments because if tax payments are higher than a business’s profits, that indicates that a business is losing money. Business owners who are discovering that their profits are not higher than their corporate tax installments, either need to drop the corporate tax installment payments, or generate more revenue for their business.
While the prophets need to be higher than corporate tax installments, entrepreneurs should understand that profits do not have to exceed CRA payroll and GST remittances because corporate taxes are paid out of profit, that CRA payroll taxes are already in the employment expense on the balance sheet. The business owner does not need toÖ Them again from their financial statement and just like GST, it bypasses the income statement altogether.