Definition
Accrued taxes are a type of liability on a company’s balance sheet. They represent taxes owed based on income earned or property value assessments, but these taxes have not yet been paid. These can include various forms of taxes such as income taxes, property taxes, and other local, state, or federal taxes that have been incurred but are paid at a later date. Accrued taxes help businesses and individuals manage their tax liabilities over time and ensure they remain compliant with laws and regulations.
Examples
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Income Taxes: Suppose a business earns $100,000 in Q1 but does not yet pay taxes on this income. The company must recognize an accrued tax liability for the amount of tax on this income.
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Property Taxes: A property owner receives a tax assessment for their property value but the payment is not due for several months. The owner will record an accrued tax expense until the payment is made.
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Sales Taxes: Retail businesses must collect sales taxes from customers and hold these funds until the scheduled tax payment date, creating an accrued tax liability.
Frequently Asked Questions (FAQs)
What are accrued taxes?
Accrued taxes are taxes that have been incurred but not yet paid. They must be recognized as liabilities on the balance sheet until payment is made.
How are accrued taxes recorded in accounting?
Accrued taxes are recorded as liabilities on a company’s balance sheet. An expense is recognized in the period the income was earned or the event affecting taxation took place.
Can accrued taxes impact cash flow?
Yes, accrued taxes can impact cash flow as businesses must plan to set aside funds to cover their accrued tax liabilities, affecting available cash for other operations.
Are accrued taxes the same as deferred taxes?
No, accrued taxes are taxes owed for the current period but not paid, whereas deferred taxes arise from temporary differences between accounting and tax balances which will reverse in future periods.
How do businesses manage accrued taxes?
Businesses manage accrued taxes by keeping meticulous records, setting aside funds, and working with tax professionals to ensure compliance and accurate reporting.
Related Terms
- Deferred Taxes: Taxes that are postponed to future periods due to differences in accounting and tax treatment of income and expenses.
- Tax Liability: The total amount of tax owed by an individual or business to taxing authorities.
- Property Tax: A tax assessed on real estate by the local government based on the property’s value.
- Income Tax: Tax levied by the government directly on personal or corporate income.
Online Resources
Suggested Books for Further Studies
- “Federal Taxation: Basic Principles” by Ephraim P. Smith and Philip J. Harmelink
- “Tax Accounting in Mergers and Acquisitions” by Glenn R.P. Willis
- “Principles of Taxation for Business and Investment Planning” by Sally Jones and Shelley Rhoades-Catanach
Fundamentals of Accrued Taxes: Taxation Basics Quiz
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