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Income taxable in one year, but cash received... Expand / Collapse
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Posted 6/12/2009 8:07:28 PM


MySF Administrator

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Hi,

This message was written and posted to assist MySF Manager users in recording income (typically dividends or distributions) or expenses where the amount is taxable in one financial year, but the cash is not actually received until the following financial year.

The usual way to account for items (income or expenses) that affect one financial year but where the cash flow occurs in another financial year is through what is called accrual accounting. The name basically refers to the fact that income (or expenses) are recorded as accrued over a certain period and we record this.

Probably the simplest example is the receipt of rent from a tenant in a property that is due on Jun 29th but is paid by the tenant on July 5th. This would be recorded as follows:

On June 29th FY1:
DR Accounts receivable $x (under assets)
CR Rent received $x (under income)
This records that there is income that you reasonably expect to receive but no cash has actually been received. The income will be included in the profit and loss and the accounts receivable amount is shown on the balance sheet.

On July 5th FY2:
DR Bank $x
CR Accounts receivable $x
This record the cash flow in for the amount that was owed. The accounts receivable account will now have a balance of $0 and your bank account will increase by $x. The profit and loss (and therefore tax) is not affected because no income or expense accounts are involved in the transaction.

If there is an expense that is incurred in one year but paid in the next year then this would be recorded as follows:
In FY1:
CR Accounts payable $x (under liability)
DR applicable expense account $x (under expense)

In FY2:
CR Bank $x
DR Accounts payable $x

Things get a little more complicated with dividends or distributions because there are lots of different components (foreign income, unfranked income, capital gains, tax deferred income, imputation credits).

The steps for processing a distribution which is taxable for FY1 but the cash is received in FY2 is as follows:
In FY1:
1) Record the dividend or distribution as normal, and designate a Clearing Bank account as the bank account.
2) Process a manual journal for the same date which will be
DR dividends receivable $x
CR Clearing Bank $x
where $x is the total amount received into Clearing Bank. This should
leave Clearing Bank with a $0 balance.

At this point all of the components of the dividend / distribution will have been recorded and will be reflected in all of the accounts as well as all of the financial reports and all tax calculations as appropriate.

In FY2:
1) For the date that the cash is received record a manual journal which will
be:
DR Bank used to receive cash $x
CR dividends receivable $x
This will clear the $x from dividends receivable and will reflect the fact that the cash has been received.

Feedback and comments are welcome.

Regards,

MySF
Post #4442
Posted 19/07/2012 8:15:06 PM
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Last Login: 26/02/2016 5:17:22 PM
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I have followed this process but the balance in Dividends Receivable 1125 for the accrued income does not appear in my taxable income for the year it is assessable.

Thanks

Post #4824
Posted 20/07/2012 1:38:26 AM
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I think I have resolved this issue. One of the distributions had been completed as tax deferred. While not being an accountant, I'm assuming this means it isn't meant to appear as income.
Post #4825
Posted 31/07/2012 10:54:18 PM


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Last Login: 26/07/2017 11:15:18 PM
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Hello,

That's correct.  A tax deferred component will result in a reduced cost base of your asset that the distribution relates to.

Regards,

MySF

Post #4831
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