Consider a tax liability that is distributed to multiple jurisdictions where 60% is allocated to the county where the store is located and 40% is allocated to the state.
Note that in this example only two jurisdictions are used; however, a real scenario may break this down further into town, school districts, and so on.
For this example, three funds exist:
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State (fund 01)
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County (fund 24)
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General (fund 99)
When a $100.00 tax is levied, the following diagram illustrates the initial GL entries for this scenario.
The state fund's A/R is debited, and the state and county funds' revenue accounts are credited.
If left at this, the funds would be out of balance; the state fund would have an overall excess debit and the county fund would have an excess credit.
To balance the funds, the state fund accepts the responsibility for collecting the county taxes from the taxpayer but immediately remunerates the charges to the county fund.
This transfer is done using the general fund. The state fund's EPC account is credited and the liability to state is debited with the amount of the county sales tax revenue. Also, the county fund's EPC account is debited and the general fund's liability to the county account is credited by the county sales tax revenue. In effect, the state fund owes the county charges to the general fund, and the general fund owes the county charges to the county fund.
The following diagram illustrates the initial GL accounting that would occur when the payment arrives.
When the payment arrives, the cash is debited to the general fund's cash account, and the state fund's A/R is relieved. Again, the funds would be unbalanced if left in this condition; the state fund would have an excess of credits and the general fund would have an excess of debits.
To maintain each fund's balance of debits and credits, the general fund's liability to the state fund is credited by the amount of the fund's share of the cash, and the state fund's EPC is debited. Note that the payment has no effect on county fund's EPC and the general fund's liability to the county fund. The county fund "received" its money from the state department when the adjustment was created.
And so, all funds have matching debits and credits.