Hi there,

I don't have an accounting background, so forgive me if I seem naive...

As a small business owner, I want to be able, at any point in time, to see exactly how much money we have at our disposal to spend or plan to spend. In order to do this, I need to take the following into account:
  • VAT Payable every 2 months
  • Income Tax Payable Every 6 Months
  • Target Based Commission Payable Every 3 Months
  • Open Purchase Orders
  • Bills Payable


So I can't just look at the bank balance and say, "Wow we're rich - let's fund a new project!". I need to take all of the above into account and calculate approximately how much cash we have available in the short term.

The way we do it at the moment is as follows - I will give the steps we follow to make provision for Income Tax, but VAT and Quarterly Commission follows a similar process.
  1. At the end of each month, we run a report to get the net profit before tax for that month.
  2. We then calculate 28% of the amount
  3. We DR the calculated amount to an asset account called "Provision for Income Tax"
  4. We CR the calculated amount to a liability account called "Income Tax Payable"
  5. This means every month both of these account balances are increasing
  6. When it comes time to pay provisional tax, our accountants let us know exactly how much to pay
  7. We make payment to SARS and DR the "Income Tax Expenses" expense account, and CR the bank account.
  8. We CR the total balance of the "Provision for Income Tax" account - leaving it with a zero balance
  9. We DR the total balance of the "Income Tax Payable" account - leaving it with a zero balance
  10. The process starts again.


This works well because we have reports that can then automatically tell us how much cash we have available to use as opposed to how much cash we have in the bank.

The problem with this method, is that it inflates the balance sheet figures and makes the company look like it is worth a lot more than it really is. I.e the total equity of the company is increased by all of the provisions we have made for tax and vat etc. Is this a bad thing, or do you just have to take that into account when valuating the company?


So my question is - is this the right way of doing it? Is there a better way? Have I completely missed the boat and I need to change the way I think about this?

Thanks