Example

What happens when you track tax liability:

• Your company pays tax liability to a Taxing Authority quarterly
• The tax liability rate is 5%
• A vendor invoices your company for $1,000
• Debit the expense account and credit the Accounts Payable (AP) account for the gross amount of the invoice
• 5% of the invoice is $50 and is a future payment to the Taxing Authority at the end of the quarter
• Credit the tax payable account and debit tax expense

Setup

1. Go to Accounts Payable, File, Company Settings, AP Settings, Invoice Settings.
2. For the Tax Usage, select Actual and tax liability.
3. Click Tax Settings to select the entry method for taxes and to select a default tax group (optional).
4. Click OK.
5. Click Additional Settings.
6. Select the Pre-tax entry at invoice level check box (this also changes the distribution level to Pre-tax).
7. Click OK three times to exit.
8. From the Setup menu, select Taxes, Tax Rates.
9. Set up a tax rate:
   1. Enter the Tax and Description, then press the Enter or Tab button.
   2. For the Tax liability payee, enter the Vendor ID of the taxing authority.
   3. Enter the Tax Rate Percentage.
   4. Select the tax state from the drop-down list.
   5. For the Debit account, select your tax expense account.
   6. For the Credit account, select your tax payable account.
   7. Decide if you need to select Exclude AP tax in amount sent to Job Cost, Equipment and Billing.
   8. Decide if you need to select Tracking tax retainage in AP. If you do, enter in the Retainage debit account and Retainage credit account.
   9. Click Save and Close to exit.
10. From the Setup menu, select Taxes, Tax Groups.
11. Set up a tax group that includes the tax rate you created. If you have more than one rate, decide if you need to use Compound Tax Rates.
12. Click Save and Close to exit.
13. From the Setup menu, select Vendors and choose your vendor.
14. On the Terms and Defaults tab, select Tax liability for the Prefilled tax column.
15. For the Tax group, enter the tax group created above.
16. Click Save and Close to exit.

Accrue

1. Go to Tasks, Enter Invoices.
2. Enter the invoice.
   • If you completed the setup as instructed, the tax liability amount automatically prefills for the Tax liability at the distribution level.
   • If you set the Tax Settings to Enter total tax for invoice and tax amount for distribution, leave the Tax at the invoice level blank. When you finish, the invoice tax amount prefills.
3. Post the invoice. When you post the invoice, it creates the following General Ledger entries.

   Account	Debit	Credit
   Expense	$1,000
   Accounts Payable		$1,000
   Tax Expense	$50
   Tax Payable		$50

This pays the vendor the correct amount of the invoice.

Report on the tax liability

1. In General Ledger, from the Reports menu, select Year-to-date Ledger.
2. Click Ranges to select the Tax Payable account.
3. Click the Modify date range check box to enter a range of dates.

Alternate report

You can also save and print the attached modified Tax Preparation report.

This report sorts by the Tax Group and prints a list of invoices within an accounting date range. It also gives the amount of tax liability accounted for when you fully or partially pay an invoice.

Attachment: APTaxPreparationModified.rpt

Pay the taxing authority

1. In Accounts Payable, enter an invoice to the taxing authority.
2. Debit the tax payable account rather than an expense account.
3. Print the check.

How do I add or change the list of available states when I set up a tax rate in AR or AP?