Accounting for Revenues

During the fiscal year actual revenues will be recognized by the modified accrual basis.
Revenues when they are available will be debited to cash or receivable and credited to
Revenues.
Example: - The City of Addis has collected the following revenues for the month of
January from the following sources.
Actual Budgeted
Taxes Br. 47,500 Br. 570,000
License & Permits 25,000 320,000
Fines & Forfeits 9,000 110,000
Total Br. 81,500 Br. 1,000,000
Record the cash collection for the month of January.
General Ledger
Date Description Debit Credit
2005 Cash 81,500
Jan. 31 Revenues 81,500

Subsidiary Ledger
Date Description Debit Credit
2005 Tax 47,500
Jan.31 License & Permits 25,000
Fines & Forfeits 9,000
81,500

At any time, throughout the budget year actual revenues will be compared with estimated
revenues in their subsidiary ledgers. The comparison is made in the Revenue Ledger in
which the Debit column is subsidiary to Estimated Revenue and the Credit Column is the
subsidiary to Revenue General Ledger.
Example:-
The City of Addis General Fund
Revenue Ledger
Source Class: Tax
Date Description Estimated Revenue (Cr.) Balance Dr. or
Revenue (Dr.) Cr.
2005 Budget Estimate 570,000 570,000Dr
Jan 1
Jan 31 Collection 47,500 522,500Dr

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 The City of Addis General Fund
Revenue Ledger
Source Class: License & Permits
Date Description Estimated Revenue (Cr.) Balance Dr. or
Revenue (Dr.) Cr.
2005 Budget Estimate 320,000 320,000Dr.
Jan 1
Jan 31 Collection 25,000 295,000Dr.

The City of Addis General Fund

Revenue Ledger
Source Class: Fines & forfeits
Date Description Estimated Revenue (Cr.) Balance Dr. or
Revenue (Dr.) Cr.
2005 Budget Estimate 110,000 110,000Dr.
Jan 1
Jan 31 Collection 9,000 101,000Dr.

Normally during the fiscal year Budget Revenue will exceed actual revenues and the
balance column will have a debit balance and that may be headed as “Estimated Revenue
Not Yet Realized”

Types of Revenues
1. Taxes
Taxes are a forced contribution (involuntary contributions) 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 tax.
Example of taxes: property taxes, sales tax (VAT), excises tax, custom duties,
income tax, business income tax, death and gift taxes and so on.
In property taxes Ad Valorem (based on value) is used. Ad Valorem taxes are
usually given as an example of revenues that are accrued i.e. available &
measurable.
The valuation of taxable property by each taxpayer is assigned by a process
known as Property Assessment. Giving formal notice of a tax to be paid is called
a levy. A tax levy especially on goods or property creates a lien, which gives the
taxing authority the power to confiscate goods or property in the event of non
payment. A penalty is a legally mandated addition to a tax on the day it becomes
delinquent and incorrect calculation of taxes by the tax payer may result in
penalties. Taxes which are not paid on time usually accrue interest on any unpaid
balance.

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 Accounting for taxes is of a particular importance because:
a. They provide a very large portion of the revenue of the governmental unit on
all levels.
b. They are compulsory contribution to the government whether the affected
taxpayer approves or disapproves of the levy.
The following accounts maybe needed to account for tax collection:
 Tax Receivable- Current
 Tax Receivable- Delinquent
 Tax Lien- Receivable
 Interest & Penalties receivable on Delinquent Taxes
 Differed Taxes
 Trust for property owners.
 Allowance for uncollectible taxes.
Deferred Taxes account is credited for taxes which are paid in year they may legally be
used for expenditures.
Tax Receivable- Current account is used to accrue taxes which are due in the current
year.
Tax Receivable – Delinquent account is used to taxes which are past due.
Tax Lien – Receivable account is used to record taking possession of goods on which an
owed tax has not been paid.
Interest & Penalty Receivable on Delinquent taxes account is used to record interest
and penalties due on unpaid taxes.
If those possessed goods are sold in an attempt to cover tax and any additional cost
incurred in collecting it Trust for Property Owners is used to record any balance
remaining from the selling price after the tax and collection costs are deducted.
Allowance for uncollectible taxes account is used for recoding the estimate of taxes
which the government will not be able to collect.

Illustration:
Land use taxes were assessed in August 2003 and were levied (formally made due) in
January 2004. The taxes are payable on February 28, 2004 to be used to meet 2004
expenditures. 99% of the taxes are expected to be collectable.
Jan 1: Tax Receivable-Current 100,000
Allowance for uncollectible-Current 1000
Revenue-Property Tax 99,000
The amount recorded as revenue is the net of the receivables less the allowance for
uncollectible taxes. This is different from for profit accounting, where the gross is
recorded as income and the estimated uncollectible amounts are charged to expense.
Assume no collections were made before the due date, on the due date Br.80.000 were
received.
Feb 28: Cash 80,000
Tax Receivable-Current 80,000
After the due date, there are no more current taxes receivable, any taxes which are not
paid by the due date, become delinquent.
Feb 28: Tax Receivable- Delinquent 20,000
Tax Receivable- Current 20,000

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At the same time the uncollectible allowance related to delinquent taxes should also be
reclassified to an allowance uncollectible delinquent taxes account.
Feb 28: Allowance for uncollectible- Current 1000
Allowance for uncollectible- Delinquent taxes 1000

Tax Receivable- Delinquent 20,000

Allowance for uncollectible- Current 1,000
Tax Receivable- Current 20,000
Allowance for uncollectible- Delinquent 1,000
When taxes become delinquent, there is usually some penalty and interest assessed.
Assume a flat penalty of 10%, plus simple interest of 12% per annum (1% per month)
Penalty & Interest on Delinquent Taxes 2000
Revenue 2000
(To record penalty 20,000*10%)
If interest is accrued monthly, the following entry would be adjusted each month.
Penalty & Interest on Delinquent Taxes 200
Revenue 200
(To record interest 20,000*1%)
Assume that 75% of the delinquent taxes plus applicable interest and penalty on those
taxes were received on March 31,2004 one month late.
March 31: Cash 16,650
Tax Receivable- Current 15000
Penalty & Interest Receivable on Delinquent Taxes 1650
(Penality&Interest 15,000*10%+15000*1%)