-Income Tax is a Direct Tax charged on the Income of an Assessee. Income Tax is always paid in advance to avoid the interest under sections 234B & 234C. For Salary, it is always deducted as a TDS every month and for other sources of income, it is to be paid in Advance. While accounting for the business transactions every month, Income Tax provision is to be made on an estimated profit for the year.
The Income Tax Provision can be made on a monthly or quarterly basis and the Tax is to be paid on or before the due date of payment.
Table of Contents
Treatment of ledgers related to Tax,
- Income Tax
- Provision for Income Tax | Income Tax Provision
- Advance Income Tax
- TDS receivable
- Income Tax Refund Receivable
Situation 1 : Accounting Entries for Provision for Income tax | Income Tax Provision and payment of Advance Income Tax.
Create the provision :
| Income Tax | Dr. | P&L | Expense |
| To Provision for Income Tax | Cr. | Balance Sheet | Liability |
Making of Payment :
After the creation of provisions (viz. monthly / quarterly / periodically), the payment is to be made on or before the due date and the entry will be,
| Advance Income Tax | Dr. | Balance Sheet | Asset |
| To Bank A/c. | Cr. | Balance Sheet | Asset |
These will be a series of entries every financial year.
From above, three accounts get created and are treated as below.
- Income Tax – Debited to Profit and Loss Account
- Provision for Income Tax | Income Tax Provision – Liability stands in the Balance Sheet
- Advance Income Tax – Asset stands in the Balance Sheet
Year-end Knock off Entry :
Now at the end of the year, the Asset and Liability needs to knock off as below. There is an equal balance in both accounts.
| Provision for Income Tax | Dr. | Balance Sheet | Liability |
| To Advance Income Tax | Cr. | Balance Sheet | Asset |
Accounting for TDS deducted from the receipts :
While accounting Income or receipt entries; TDS deducted will get Debit to ‘TDS receivable’. This will get transferred or reclassified to income Tax at the end of the year.
Entry when the Tax is get deducted at the time of receipt of Income,
| Bank / Deposit account | Dr. | Balance Sheet | Asset |
| TDS receivable | Dr. | Balance Sheet | Asset |
| To Income / Interest / Revenue | Cr. | P&L | Income |
At the end of the year, TDS receivable has to be reconciled with 26AS. And thereafter below entry has to be accounted.
| Income Tax | Dr. | P&L | Expense |
| To TDS receivable | Cr. | Balance Sheet | Asset |
Situation 2 : Provision for Income tax for Self-Assessment Tax :
At the time of finalisation of the Audit for the year, there may be some adjustment entries required to be accounted for. And due to this, the Tax liability will get increased than whatever was paid earlier. Such an increase in Tax tax must get Debited to P&L in the same Financial year which is under Audit.
E.g. During the Audit, there may increase in Tax liability for Financial Year 2019-20. This liability will get paid next year i.e. 2020-21. This is called Self-Assessment Tax.
Entry to account for the increase in Tax liability.
(In the year 2019-20)
| Income Tax | Dr. | P&L | Expense |
| To Provision for Income Tax | Cr. | Balance Sheet | Liability |
Entry for payment of the liability.
(In the year 2020-21 i.e. payment of Self-Assessment Tax)
| Provision for Income Tax | Dr. | Balance Sheet | Liability |
| To Bank A/c. | Cr. | Balance Sheet | Asset |
Situation 3 : Accounting of excess tax paid for the year.
There may be a reverse situation than situation 2 above. i.e. If say, during the Audit of 2019-20, due to Audit entries the income may get reduced and so the Tax is. This situation results in excess payment of tax which is eligible for claiming refund after filing the Income Tax Return (ITR). It will be accounted as below.
| Income Tax Refund Receivable | Dr. | Balance Sheet | Asset |
| To Income Tax | Cr. | P & L | Expense – deduct from IT Dr. |
It will reduce the Income Tax expense & created an Asset to the extent of Income Tax Refund Receivable.
After receipt of this refund claim below entry will get accounted for. Assume that the refund is received with Interest.
| Bank A/c. | Dr. | Balance Sheet | Asset |
| To Income Tax Refund Receivable | Cr. | Balance Sheet | Asset |
| To Interest Income | Cr. | P & L | Income |
The ‘Income Tax Refund Receivable’ is tracked separately & reconciled with a separate tracker.
