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Monday, 16 November 2015

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)


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.

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.
Feel free to express your opinion on the article. Share your views in a way to improve upon the same.

Prithvi Krishna
(Reach me at


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  2. The information on income tax provided here was really awesome and useful. Thanks for sharing the post.
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  3. Very wel explained....u solved the problem.....thank you

  4. I'am confused with the explanation here.
    I am willing to find the adjustment if a pay tax in advance of 6400 and also create a provision for tax liability of 7000

    1. Hi, I didn't understand the specific question. If you have paid an advance tax of 6400, the same has to be shown on the assets side and 7000 is a provision shown on liabilities side. On the date of filing of return, the both have to be set off and 600 has to be paid.

    2. Hi,
      I have a doubt.
      What if in the above example, I create provision for Rs.40 instead of Rs.30.9.
      After passing the entry for payment of tax there will be balance of Rs.9.1 in Provision for tax account, can it be carried forward, and in the next year to create provision for tax for an amount of Rs.30.9 is it enough to create balance i.e.,Rs.21.8 making the provision account totaling to Rs.30.9
      Please give the reply at the earliest.

    3. Hi vinod,

      There is no point in creating an excess provision first and carrying it to the next year. It doesn't reflect a true picture and is not a good practice.

      And when you under provide for the same in the next year, it amounts to non following the basic principle of Matching Concept in Accounting.

      Hope I have addressed the issue.

      Reply in case your issue is not resolved.

  5. Hi, If the company was in loss previous year and claimed for tds on hold. But after completing audit for last year auditor claims profit in the year. And the company has to be paid extra tax after deducting the tds on hold in current year, then what is the entry should be made in this year.

    1. Hi Krishanu Das,

      If TDS was claimed as per Income Tax Return, then an asset is recognized as per the books of accounts on the date of filing of return. However, the auditor has an objection to the same and the company had to pay extra tax after assessment. The asset which is recognized needs to be expensed off i.e. write off the asset to the Profit and Loss of the year in which the assessment is completed and the extra amount can also be recognized as an expenditure in the year of payment.
      But, both of the above mentioned expenses have to be disclosed under the head tax expenses - Prior Period Tax.

      This will address the issue.


  6. The Company has won a tax case in high court. A provision of $5,000 is being carried for this case.