How to reflect a liability at the end of your financial year

How to use a pseudo “Bank” account to reflect a liability at the end of your financial year

MoneyMinder is a cash basis system. The only Balance Sheet items available are Bank Accounts.

Occasionally users feel a need to record a liability to show on their end of year reports. This
workaround is recommended only for users with an accounting background. Also, it is
recommended that this be used only at the end of the financial year to show funds that are due
and payable at that time. Trying to use this during the year leads to unnecessary work and the
potential for a lot of confusion.

Our preference is always to record a withdrawal on the last day of the financial year for the
amount that is owed. It will not clear the bank. It will show as an uncleared item which will
show up on the first reconciliation in the new year.

If for some reason you are not able to do this, you can use the following method.

First set up your Heading for Off Budget categories, aka Funds not belonging to local unit aka
Escrow Funds. The Categories that we expect to see there are National Dues, State Dues, and
Sales Tax. Make sure that you do not enter budget numbers here. The intention is that any
money coming in will go out, resulting in a net of zero. There is nothing to be gained by entering
budget numbers under this Heading – it will only confuse your reporting.

During the year deposits are made to each of these Categories. They will show under Income.
As time goes on, payments are made to the appropriate organization. They will show under
Expenses. The net of these totals is how much is still owed to the organization. (If you have
budget numbers entered the number shown will be unpredictable and therefore not useful.)

In a perfect world, by the end of the year your net for each of these Categories will be $0.00. If
that is the case your job is done. You have no liabilities at the end of the year so no need for
this workaround.

If, however, you do end up owing money to an organization and you are unable to record that
payment with the last day of the financial year, you can use this workaround:

  • Set up a Bank Account called Sales Tax Payable or whatever makes sense to you.
  • When you have a final number that is owed at the end of the year, and only at the end
    of the year, record a withdrawal from this Sales Tax Payable account for the amount
    that is owed. Assign it to the Sales Tax Category under your Off Budget Heading.
  • This will result in the net of the Sales Tax category equaling $0.00. If it does not, Stop.
    You have done something wrong.
  • Now your Sales Tax Payable account will show as having a negative balance. If it does
    not, Stop. You have done something wrong.
  • This is the amount that you will pay in the next financial year.
  • It has the effect of reducing your available bank funds, which is appropriate.

The final step happens in the new year when you record the payment to the appropriate
agency. THIS IS IMPORTANT. If you handle it some other way you will never get things to
calculate correctly.

  • Your bank accounts will copy over from the prior year. It is important that you include
    the Sales Tax Payable account in this.
  • Say the Sales Tax owed is $100 (the balance will show as -$100.00). Record a Transfer
    from the appropriate Checking account to the Sales Tax Payable account. There is a
    place for a reference # which will be the check # if that is how you are paying. You can
    enter a descriptive memo.
  • This will result in the Sales Tax Payable account going back to $0.00 which is exactly
    what you want. If it does not, Stop. You have done something wrong.
  • It will also show a withdrawal from the Checking account for that amount which is also
    what you want as it reflects what really happened.
  • If you try to thwart this process by using a withdrawal and a deposit you will overstate
    both your income and expenses for no good reason resulting in reports that are
    confusing both to explain and understand.

The goal at the beginning of the financial year, once you have paid your liability, is to have it
show as $0.00. You won’t need it again until the end of the financial year.

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