As we all know, we are at the end of our financial year. Hence everybody is focused on finalisation of their books of accounts. The actual taxation entries are most important things as they clear the Balance sheet picture and gives real result. Therefore, today I am covering some of the most important accounting entries and concepts related to income tax provision, TDS and advance tax.
Before going to understand the taxation entries, we should clear the various heads relating to Income Tax.
[1] Provision for Income Tax :
This provision is created from profit. This is below the line entry. After adjusting necessary items from gross profit, (e.g. depreciation booked in books of accounts and depreciation allowable as per income tax rules) taxable income arrives. On that taxable profit we have to make provision for income tax at prevailing rate of income tax.
Accounting entry will be as under:
Profit & Loss A/C DR (provision for income tax)
To Provision for Income Tax A/C
This provision being a liability, showed at “Capital & Liability” side of Balance Sheet in the bracket of “Other Liabilities”.
[2] Advance Income Tax :
As per Income Tax Act, we have to pay advance income tax and that is showed at “Property & Assets” side of Balance Sheet in the bracket of “Other Assets”.
Accounting entry will be as under:
Advance Income Tax paid A/C DR
To Bank A/C
In case of self assessment tax also this entry is passed but the narration will be for self assessment.
[3] TDS Recoverable/Receivable:
Generally some tax is deducted at source from our income of interest or commission etc and we get net income. To simplify if interest received is Rs.9000/- and TDS deducted on that is Rs.1000/-, the total income would be Rs.10000/-
Accounting entry will be as under:
Bank A/C DR Rs 9000/-
TDS recoverable A/C DR Rs 1000/-
To Interest Received (Income) A/C Rs 10000/-
TDS recoverable also showed with advance income tax at “Property & Assets” side of Balance sheet.
Generally the sum of TDS & advance income tax remains more than provision of income tax.
But the tax calculated in Return should be equal to Provision of Tax, if it is not so the entries should be passed for difference :
If provision is less than Tax calculated in return, we have to make additional provision
Accounting entry will be as under:
Income tax Provision for Earlier years A/C DR
To Provision for Income Tax
To TDS recoverable A/C
If provision is greater than Tax calculated in return, we have to reverse the additional provision made :
Accounting entry will be as under:
Provision for Income Tax A/c Dr
To Excess Income tax Provision for Earlier years –written back A/C
Now, we should consider the various stages of Income Tax refund :
[1] If our return is accepted without any disallowance and without any demand :
Accounting entry will be as under:
Provision for Income Tax A/c Dr.
To Advance Income Tax Paid
To TDS recoverable
[2] If demand is raised and accepted for short taxes due to non allowance of expenses, non allowance of records, mistake in computation calculation, non allowance of depreciation, non reflection in 26AS of tds deducted etc.
In addition to entry shown in [1],
If tax paid by cheque ,
Accounting entry will be as under:
Income tax paid for earlier years Dr (profit & loss a/c)
To bank a/c
If adjusted from other refund for another A.Y.,
Accounting entry will be as under:
Income tax paid for earlier years Dr (profit & loss a/c)
To Advance Income Tax Paid
[3] If refund is received with interest, (interest on refund is taxable income)
Expected refund = Advance Income Tax Paid + TDS recoverable – Provision for Income Tax
If refund received is less than expected refund,
Accounting entry will be as under:
Bank A/c Dr (if received by cheque = tax refund + int. on refund)
Advance Income tax Paid A/c Dr (if adjusted with another year’s demand)
Provision for Income Tax Dr
Provision for Income Tax for Earlier years Dr (Profit & loss A/c-for additional provision))
To Advance Income Tax Paid
To TDS recoverable
To Interest on Income Tax refund a/c
If refund received is greater than expected refund,
Accounting entry will be as under:
Bank A/c Dr (if received by cheque = tax refund + int. on refund)
Advance Income tax Paid A/c Dr (if adjusted with another year’s demand)
Provision for Income Tax Dr
To Advance Income Tax Paid
To TDS recoverable
To Income Tax refund a/c (additional amt than expected-P/L a/c)
To Interest on Income Tax refund a/c (P/L a/c)
In this article I have tried to cover almost all types of tax related entries, which will be helpful to all the persons related to tax. However, I have not touched any sections of Income Tax Act to make simple this concept. Your valuable suggestions and real comments are highly welcome.
Republished with Amendments
FAQs
How do I account for income tax provision? ›
Multiply the current year taxable income by your current statutory federal tax rate. The result is your company's current year tax expense for the income tax provision.
How do you pass journal entry for provision for tax? ›Accounting entry will be as under:
Provision for Income Tax A/c Dr. [2] If demand is raised and accepted for short taxes due to non allowance of expenses, non allowance of records, mistake in computation calculation, non allowance of depreciation, non reflection in 26AS of tds deducted etc.
Step 1. Create a Ledger "Provision For Expense"(E.g. Provision for Electricity) under General Ledger-->>Chart Of Accounts-->>Liabilities. Step 3. Pass a journal Entries Debit Expense Account and Credit New Account created "Provision for Expense Account.
What is the journal entry for advance tax paid? ›Entries are : (i) For Advance Payment of Tax: Advance Income Tax A/c To Bank A/c (ii) For Tax deducted at source, say on interest income : Bank A/c Tax Deducted at Source A/c To Interest Income A/c (iii) For Tax due on final assessment : Dr. Dr. Dr. To Provision for Tax A/c Dr.
Is income tax provision income tax expense? ›An income tax provision represents the reporting period's total income tax expense. This includes federal, state, local, and foreign income taxes. The ASC 740 income tax provision consists of current and deferred income tax expense.
Where does provision for tax go in income statement? ›They appear on the company's balance sheet under the current liabilities section of the liabilities account.
What is the accounting entry for provision? ›What is the accounting entry for provision? A provision is debited as an expense and also credited to the corresponding liability account.
How do you account for provision in accounting? ›Accounting for a Provision
A provision should be recognized as an expense when the occurrence of the related obligation is probable, and one can reasonably estimate the amount of the expense. The relevant expense account is then debited, while an offsetting liability account is credited.
(1) Provision for taxation can be treated as a current liability and it will decrease the working capital in the schedule of changes in working capital.
What is the journal entry for provision? ›What is the accounting entry for provision? A provision is debited as an expense and also credited to the corresponding liability account.
Does provision for income tax go on balance sheet? ›
The first key product of the tax provision is the income tax expense (or benefit) included on the income statement. The next are the income tax payable (or receivable) and deferred tax asset (or liability), which are calculated on the balance sheet.
Is provision for income tax an asset? ›It is the legally enforceable right they have against you. The income tax payable is usually your outstanding liability for previous years. If you paid PAYG instalments, your income tax payable might actually be an asset. The asset will represent the instalments you paid for the current year.
How is provision for tax treated in profit and loss account? ›Provision for taxation may be considered as non-current item. Such a treatment does not change working capital position. Provisions made for taxation during the current year is transferred to adjusted profit and loss account. The amount paid as tax is shown as an application of fund.