In 2014 we prepaid 60k in estimated fed taxes. When I got our fed tax return back in March we owed 56,357. I made this entry in March 2015:
DR Federal Tax Expense 56,357
DR Other Income 3,643
CR Prepaid Fed Tax 60,000
The problem I have is when closing out March I saw that the tax expense of 56,357 is now being recorded in 2015. I don't know if this is correct. I've just taken over this job and am learning as I go as we are a small family business. Can someone let me know if I need to show the entry in December 2014, or book it in March 2015. If I do the entry in 2014 does it need to be a reversing entry? I'm very confused at this point. Any help would be appreciated.

The prepaid account is a prepayment that is an asset. When the actual tax is paid the residual balance becomes a below the line prior year adjustment.

Your entry should have been dr Prepaid tax 60,000 in 2014, credit cash creating the asset. You now have an asset of 3,643 being the amount owed to you you need to correct your 2014 accounts or book the prior year adjusment in the current year

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Originally Posted by paraclete

The prepaid account is a prepayment that is an asset. When the actual tax is paid the residual balance becomes a below the line prior year adjustment.

Your entry should have been dr Prepaid tax 60,000 in 2014, credit cash creating the asset. You now have an asset of 3,643 being the amount owed to you you need to correct your 2014 accounts or book the prior year adjusment in the current year

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Thank you so much.. this is exactly what I needed to know.
Peg