Administer the Governmental Account

Taxes

Taxes are a forced contribution imposed on the citizens by the government. Citizens are
given no choice but to pay. Taxes must be paid, regardless of whether or not the citizen
being taxed is receiving any direct benefit as a result of paying the tax.

In governmental and Not for profit entities (NFP) we need to record every events if any
transaction associated with a certain account which is initially established, this account
is asset and Liability.

In Governmental Account to revenue accounts, the following accounts may also be

needed to account for tax collections:

● Taxes receivable-current,

● Taxes receivable-Delinquent Tax

● Lien-Receivable,

● Interest and penalties Receivable on Delinquent taxes (All Four are Asset)

NB: Deferred Taxes, Trust for property owners (Both are Liabilities),

NB: Allowance for uncollectable taxes (contra asset). Bad debt expense is not used for
taxes. Any uncollected taxes are accounted for as a reduction of revenue. Note that this
is different from for profit accounting.

● The taxes receivable-current account is to accrue taxes which are due in the
current year.

● The taxes Receivable Delinquent account is used to record any taxes which are
past due.

● The tax lien receivable account is used to record taking position of goods on
which an owed tax

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has not been paid.

● Interest and penalties Receivable on Delinquent Taxes account is used,

obviously, to record interest and penalties due on unpaid taxes.

NB: The allowance for uncollectable Taxes account is used for recording the
estimate of taxes which the government will not be able to collect.

Practical Example
Land use taxes were assessed in August 2004, and they are levied (formally made
due) in January, 2005 Birr (100,00). They are payable by February 25, 2005. They are to
be used to meet 2005 Expenditures. Ninety-Nine percent (99%) of the taxes are expected
to
be collected. Record the Journal Entry

Dr. Tax Receivable Current………100,000

Cr. Allowance-for Uncollectable current tax…………….1,000

Cr. Tax Revenues……………………………………………99,000

NB (To Record accrual of tax Receivable Current)

Continued…..Assume no collections were made before the due date (February 28, in this
case),
and on the due date, 80,000 Birr was received.
Dr. Cash …………………………….80, 000
Cr. Taxes receivable current…………………80,000
NB (To record collection of taxes)

Any taxes which are not paid by the due date become delinquent, and should be
reclassified from the current taxes receivable to the delinquent taxes account. This entry
follows:
Dr. Taxes Receivable-Delinquent ………………20,000

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 Cr. Taxes Receivable-current……………………20,000
NB (To record taxes becoming delinquent)

(Delinquent)- Delinquent taxes are those which are not paid by the due date. At the same
time, the uncollectable allowance related to delinquent taxes should also be reclassified
to an allowance for uncollectable taxes account. This entry follows.
Dr. Allowance for uncollectable current tax ……………1,000
Cr. Allowance for uncollectable Delinquent tax …………1,000
N.B (To record reclassification of allowance of estimated losses on taxes)

When taxes become delinquent, there is usually some penalty and/or interest assessed.
The penalty and interest may be accrued, although sometimes it is not.
Assume a flat penalty of 10% plus simple interest of 12% per annum (1% per month).
Penalties on the above delinquent taxes would be 2,000 birr (20,000*10%). The accrual
entry is:
Dr. Penalties on Delinquent Taxes ………………2,000
Cr. Revenue………………………………………………………2,000
N.B (To record penalties due on delinquent taxes)

Monthly, Quarterly, Semiannually or at year end interest could be accrued.

If it is accrued monthly, the following entry would be required each month (20,000 Birr*
1% per month =200). The entry would be adjusted each month, of course, for any
Payment received during that month.
Dr. Interest on Delinquent taxes……………200
Cr. Revenues………………………………………………200
N.B (To record monthly interest due on delinquent taxes.)

Continued…Assume that 75% of the delinquent taxes plus applicable interest and
penalties on

those taxes were received on March 31, 2005, one month late [15,000 + 1,500

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 (10% Penalty) + 150 (1% interest)]

Dr. Cash…………………………………………16,650

Cr. Tax receivable-Delinquent…………………….15, 000 (20,000*75%)

Cr. Penalties on Delinquents tax ….… 1,500 (2,000*75%)

Cr. Interest on Delinquents tax ….… 150 (200*75%)

NB: (To record collection of delinquent taxes plus penalties and interest)

Note that if penalties and interests had not been previously accrued, that credit to
1,650 above would have been to revenues.

Continued…After a certain time period had passed from the due date, for instance,
Six months, the lien would come in to effect, and the property on which the tax was
due could be seized by the governmental unit. At the time of seizure the following
entry would be necessary [5,000 (tax owed) + 500 (Penalty) + 300 (Interest 5,000*
1%* 6 months)]

Dr. Taxes lien-Receivable………………………..Br.5, 800

Cr. Taxes Receivable – Delinquent……Br.5, 000 (Remaining 25% 0f

2,000)

Cr. Penalties on Delinquent taxes……………..500 (Remaining 25% 0f 2,000)

Cr. Interests on Delinquent taxes……………..300(5,000*1%*6 Months)

NB: (To record Seizure of property for unpaid taxes)

When the seized property is sold, the taxes, plus interest and penalties, plus any cost
of the sale should be paid. Any excess is held in trust for the owner of the property.

Continued…Assume that the property is sold for 7,000. For simplicity, assuming there
is no cost associated with the sale, the following entry is needed:

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 Dr. Cash…………………………….Br.7,000

Cr. Tax lien Receivable………………….Br.5, 800

Cr. Trust for penalty owner………………Br.1,200

NB: (To recorded sale of seized property)

When the owner claimed back the birr 1,200 excess the trust for the property owners
account would be debited, and cash credited.

Dr. Trust for property owners………………….Br.1, 200

Cr. Cash……………………………………………Br.1, 200

Exercise
Dire Dewa Municipality Land use taxes were assessed in August 2004, and they are
levied (formally made due) in January, 2005(1,900,000). They are payable by February
25, 2005. They are to be usedto meet 2005 Expenditures. Ninety-Nine percent (97%) of
the taxes are expected to be collected.
Required: (1) Record the necessary entry?

Assume no collections were made before the due date (February 28, in this case),
and on the due date, 1,700,000 Birr was received.

Required: (2) Record the necessary entry?

Assume that the current taxes receivable should be reclassified from the current taxes
receivable to the delinquent taxes account.

Required: (3) Record the necessary entry?

Assume a flat penalty of 10% plus simple interest of 12% per annum (1% per month).

Required: (4) Record the necessary entry?

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Assume that 80% of the delinquent taxes plus applicable interest and penalties on

those taxes were received on March 31, 2005

Required: (5) Record the necessary entry?

Example for Fund Accounting

1. Harare municipality approved and adopted the budget fo the year 2014 E.c on
July 1. The estimated revenue from the property tax is 2,500,000. Interest and
penalty birr 15,000 and license and permits birr 14,400 and the amount of
authorization for appropriation for general is birr 1,500,000. Public safety birr
600,000 and health and welfare birr 155,000.

Task 1 calculate the fund balance

2. Make the necessary Journal Entry including subsidiary Account

Answer for the Practice

● Est. Revenue: Property Tax 2,500,000 + Interest/Penalty 15,000 + License/

Permit 14,400 = 2,529,400
● Appropriations: General 1,500,000 + Public Safety 600,000 + Health/Welfare
155,000 = 2,255,000
Task 1: Calculate the Fund Balance (Budgetary)

● Budgetary Fund Balance = Est. Revenues - Appropriations

● Budgetary Fund Balance = 2,529,400 - 2,255,000 = 274,400 (Budgetary Surplus)
Task 2: Make the Necessary Journal Entry (including subsidiary)

General Ledger Entry:

Account Title &

Date Debit Credit
Explanation
Estimated Revenues 2,529,40
Jul 1
Control 0
Appropriations Control 2,255,000
Budgetary Fund Balance 274,400
(To record the adopted

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Subsidiary Ledger Detail:

● Estimated Revenues Subsidiary Ledger:

o Property Tax: Dr. 2,500,000
o Interest and Penalty: Dr. 15,000
o License and Permits: Dr. 14,400
o (Total Debits = 2,529,400)
● Appropriations Subsidiary Ledger:
o General Government: Cr. 1,500,000
o Public Safety: Cr. 600,000
o Health and Welfare: Cr. 155,000
o (Total Credits = 2,255,000)

2. Addis Ababa municipality approved and adopted the budget for the year 2015 E.c on
July 1. The estimated revenue from the tax is 1,900,000. Interest and penalty birr 10,000
and license and permits birr 10,000 and the amount of authorization for appropriation
for general and other fund is birr 1,600,000. Public safety birr 100,000 and health and
welfare birr 80,000.

Task 1 calculate the fund balance

Task 2. Make the necessary Journal Entry including subsidiary Account

Prepare Financial Statement for Governmental & NFP EntitiesDawit T.