Property tax accrual journal entry is to record a due entry.
We can consider it as a remainder entry.
It’s a standard accounting practice to record the entries as and when the expenses are incurred, irrespective of the payment status.
Let’s have a logical understanding of this concept.
Table of contents
Property tax expense journal entry
We will start with the recording of Property Tax expense Journal entry
Practically, it wouldn’t be a good idea to operate on a cash basis. There’s a need to postpone the payment.
It doesn’t mean dishonoring a payment.
In other words, we will defer the payments by a couple of days. So, there will be a gap between the incurring of expenses and its payments.
For example, we will not pay the utility bill at the end of the month. The state authorities allow for a buffer. Thus, there’s the interval between the incurring of expenses and the happening of payments.
Now, let’s record the property tax using the accrual concept.
Property tax accrual journal entry
This accrual will be the best estimate in the absence of the exact details.
Let’s say there is a change in the rate of properties three times during the assessment year. Each change is for a different property.
Assuming the taxpayer has twenty different types of property.
Doesn’t it sound like a complex calculation for a person whose focus is on expanding business, gaining new projects and offering elite customer services?
So, business estimates are based on their available data.
Further, the property owner is not fully aware of the facts, applicable rates as per the respective state laws, various exemptions, and benefits that are valid as of the tax assessment date.
However, State Authorities will levy the relevant taxes as per the applicable laws and regulations.
How do we estimate the property tax?
Accruals are estimates. It needn’t be super accurate.
But that’s allow us to have unrealistic estimates.
Suppose the actuals are $500K, whereas estimates stand at $1,200K. Considering the basic understanding of taxes and their applicability or looking at our peers helps us to arrive at a reasonable value.
The first entry is to record the property tax accrual. It’s recorded in the books as a placeholder until the payments are made.
In other words, the accrual liability will be offset by making the payment.
Q&A Corner
What’s the journal entry for accrued property taxes?
Accrued property taxes are recorded by debiting the property tax expense and crediting it with a current liability, as the expenses are payable within 12 months.
What does the accruing property taxes due mean?
Accruing is recording the transaction as and when it is incurred. This approach is in accordance with the Matching principle of accounting.
Per this principle, all the expenses incurred shall be matched with related income earned. We can learn through a matching exercise.
Mr. King earns a monthly salary of $9,500. He’s keen on building a stock portfolio of blue-chip companies by investing $2,000 each month.
Stocks are maintained in a demat account with a reputable broker. The broker charges a commission of 0.2% on the trading activity. The commission is payable immediately after the occurrence of trade.
Apart from commission, an annual maintenance charge of $100 is payable for the demat account. The current year’s payment is due by the 10th of next year.
King wants to understand the total cost of purchasing the investments for the year. The commission is a direct expense and will be part of the investment expense. The challenge here is to understand if the maintenance charges are part of the expenses.
The answer is obviously yes.
In other words, King wouldn’t be able to buy the shares without incurring the $100 annual charges. The total cost includes both commission and yearly maintenance charges.
How to implement prepaid tax in accounting?
Prepaid tax means upfront payment of the tax expense. Generally, this prepayment happens at the beginning of the year.
There can be some benefits if the prepayments are done for more than a year. These kinds of prepayments are not quite often. But it can yield some tax savings.
Prepaid tax is an asset to the business. It needs to be amortized as per the applicable period.
For example, an entity pays upfront property tax for two years in the current period. So, the business needs to record only half of it as the current year’s expense and the remaining shall be recorded as a current asset.
Let’s understand the entries with the assumption of a $6,000 tax paid for two years.
Explain the concept of deferred property tax
The concept of deferred property tax is an excellent relief for taxpayers with financial instability.
Well, deferment of taxes depends on the respective state authorities and applicable laws in the country of residence.
Taxpayers are provided with the deferment of property tax if they meet certain conditions, like having the prior year’s gross income less than a certain amount prescribed by the state if there is a debt settlement or the taxpayer has died.
Deferment is a liability that is postponed for a different month or financial year.
So, there is no need to record these entries.
Key Takeaways
The Purpose of the property tax accrual journal entry is to record the accrual of the taxes due on the property. This entry is similar to any other expense accrual. The nature of the expense varies.
Accounting involves debiting the property expense and crediting the accrual liability.
There can be instances where property tax is paid in advance or deferred per the state authority laws and regulations. Tax Deferment doesn’t result in recording the entry. Prepaid tax results in an asset and is subject to amortization in the year it’s due.