Investors appreciate it when a company’s leadership lays out operating results in a straightforward and easy-to-read format, telling readers how the business made money during the period under review. The gist of these results also covers strategies and tactics top leadership relies on to report accurate performance data, including balance sheets and accrued income taxes.
Accrued Income Taxes
Accrued income taxes represent money a business owes the Internal Revenue Service -- as well as state, county and city revenue officials -- at the reporting date. In accounting terminology, "accruing income taxes" means not paying fiscal dues outright. The corporate taxpayer can send funds to the IRS based on regulatory guidelines and applicable agreements it previously signed with fiscal authorities. When a business receives a bill from a revenue agency, a bookkeeper debits the income tax expense account and credits the income tax payable account -- the other name for the accrued income tax account.
Fiscal Debt Extinguishment
When finance people talk about extinguishing a debt, they mean repaying it. Accruing income taxes is an effective tactic from a money-management standpoint, but a business must settle its fiscal dues at some point -- lest the IRS levy hefty fines or spearhead an in-depth review of corporate records. When an organization remits tax dollars, a bookkeeper credits the cash account and debits the accrued income tax account to bring it back to zero. In a financial lexicon, crediting the cash account means decreasing funds in operating coffers.
In the corporate context, managing the balance sheet typically is a moot point -- the kind of subject that sees the contribution of various groups, especially when it comes to solvency and liquidity management. For example, questions such as how much operating money to hoard, which assets to purchase and what merchandise levels to order typically require the contribution of personnel as varied as accountants, financial managers and in-house treasurers. Being solvent means having more assets than debts, and these two items make up a balance sheet, alongside corporate equity. Liquidity management deals with tools and strategies department heads rely on to keep operating coffers flush with capital, shying away from projects with no clear potential and those that could break the company’s bank.
Financial Reporting Implications
On a balance sheet, accrued income taxes are short-term or long-term debts -- the exact classification depends on the repayment window. If the government expects tax dollars within the next 12 months, the accrued debt is a short-term obligation; otherwise, it’s a long-term commitment.