The actual taxation entries are most important things as they clears the Balance sheet picture and gives real result.

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.

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”.

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/-

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

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 :

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 :

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 ,

Income tax paid for earlier years Dr (profit & loss a/c)

To bank a/c

If adjusted from other refund for another A.Y.,

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,

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,

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.

DIPESH SHANTILAL SHAH

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  • Praveen Kumar

    Sir,
    As Per Schedule III, Provision for Tax should be disclosed under Sub-Head “Short Term Provisions” under Head “Current Liabilities” and NOT under “Other Liabilities”.
    Please comment if its not true.

  • Ramalinga

    But in practice, we net off the advance tax with tax provision and show only the NET TAX Provision in the balance sheet. Otherwise, the asset is unnecessarily overstated!

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