Journal Entry of Provision for Income Tax

Accounting is not a rocket science, but it has got enough of complications in it. It is generally seen in most of the cases that many people find difficulty in passing the correct journal entry for Provision of Taxation.

The major problem which we come across is that Tax Deducted at Source Receivable is not segregated year wise. Ensure that the TDS Receivable is segregated according to the year in which it is to be receivable.

Let us learn the journal entry with the example to make it clear.

Profit before Tax - 100

Tax @ 30.9% = 100*30.9/100 = 30.9 

Profit After Tax - 69.1

The above is what we see in Profit and Loss Account.

But in Computation of income we see a couple of other things,

Case- 1:
Tax Payable = 30.9
Less: TDS Receivable - 29
Less: Advance Tax Paid - 5
Net Tax Payable/(Refundable) = (3.1)

Case- 2:
Tax Payable = 30.9
Less: TDS Receivable - 20
Less: Advance Tax Paid - 5
Net Tax Payable/(Refundable) = 5.9
In case-1 the company need not pay any amount of tax as the TDS  and Advance Tax paid suffice the amount of tax payable.

In case-2 the company need to pay tax.

Let me make you clear that the provision is to be made in both the cases.

It is quiet simple, TDS Receivable and Advance Tax paid are your Current assets. In case - 1, if you don't have TDS and Advance Tax, you need to pay an amount of 30.9 in cash/ bank. But since there is TDS and Advance Tax , THERE IS NO CASH OUTFLOW. BUT SINCE THE LIABILITY IS SET OFF BY THE ASSET, THERE IS REDUCTION IN THE VALUE OF ASSET WHICH IS AS GOOD AS CASH OUTFLOW.

Let me come to the accounting entry for the same,

Irrespective of the case the below mentioned entry will remain the same :
Need to pass the entry on 31st March:

Income Tax A/c ( Indirect Expenses)........................ Dr                                            30.9
                      To Provision for Taxation A/c (Short Term Provisions)                                 30.9
(Being Provision for taxation made for the year)

Case-1:

As at 31st March , the balance sheet will show
Income Tax payable under Short Term Provisions - 30.9
TDS Receivable - Current Assets -- 29
Advance Tax Paid - Current Assets - 5

This entry is to be passed on the date of filing of return

Provision for Tax A/c .....................................Dr                            30.9
Income Tax Refund Receivable A/c ..............Dr                              3.1
                              To TDS Receivable A/c                                                 29
                              To Advance Tax Paid                                                      5
(Being Income Tax paid and Refund claimed)

This entry sets off the Provision with the asset and gives rise to another asset i.e. Income Tax Refund Receivable.

Income Tax Refund Receivable is to be grouped under Other Current Assets.

Case-2:
As at 31st March , the balance sheet will show
Income Tax payable under Short Term Provisions - 30.9
TDS Receivable - Current Assets -- 20
Advance Tax Paid - Current Assets - 5

This entry is to be passed on the date of filing of return

Provision for Tax A/c .......................................Dr                            30.9
                              To TDS Receivable A/c                                                20.0
                              To Advance Tax Paid                                                     5.0
                              To Cash / Bank                                                               5.9
(Being Income Tax paid)



Hope I didn't confuse you guys.