How should the Tax Anticipation Note (TAN) of $200,000 from a local bank be recorded?

When a local government issues a Tax Anticipation Note (TAN), it is essentially borrowing money in anticipation of future tax revenues. To accurately record this transaction, an increase in cash resulting from the borrowing needs to be reflected in the accounting records.

The correct way to record the issuance of the TAN involves debiting the Cash account to reflect the inflow of funds from the bank. The corresponding credit must go to the Tax Anticipation Notes Payable account, which recognizes the obligation that the government incurs as a result of borrowing. This accounting treatment captures both the increase in assets (Cash) and the increase in liabilities (Tax Anticipation Notes Payable).

This method follows the fundamental principles of double-entry accounting, ensuring that the accounting equation (Assets = Liabilities + Equity) remains balanced. In this case, the increase in cash assets directly correlates with a corresponding increase in liabilities, demonstrating the financial obligation incurred by the government.