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

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17 Comments

  1. Vinod says:

    If suppose Advance tax150000, TDS 20000 for FY 2018-19 Refund for AY 2019-20 Rs. 70000 what is the entry should be made
    Pls tell me sir if you know ans in above Gmail id

  2. BAIDYANATH MANDAL says:

    I am a Partner of a Firm, in Firm’s Capital A/C Debit side To Drawings Rs.60000/- To Advanced Tax Rs.15000/- To Income Tax Rs.8400/- & Credit side By Remuneration Rs.120000/- By Interest on Capital Rs.72000/- & By Share of Profit Rs.75000/- my queries that what will be Journal entry in my Tally (what is the Ledger & Under of the Ledger) of all entry of Debit Side. like IncomeTax & Drawings (In Partner’s Individual file Entry)

    (matlab Partners ke Tally Accounts me Income Tax & Drawings ka Treatment keya hoga or jo ledger create hoga o kiska under me hoga)

    KIndly Inform me in mail Address early as possible
    Thanking You

  3. KSK says:

    Company has not made any provision for income tax since A.Y:2017-18 and continuous to show the TDS amount in balance sheet as reflected in 26AS of the relevant year the company has received refund related to A.Y:2017-18 how it will adjust the refund to TDS Receivable account of the respective year amount incase refund amount is less than 26AS amount of respective year

    1. NARENDER SATYAMURTI says:

      SIR, PROVISION FOR INCOME TAX WILL ENDS UP IN THE SAME YEAR , i.e if we have made a provision for income tax in 2018-19, then ? may it goes in next year & 2ndly may ifs effect the partners capital & how , please reply

  4. Kishor Ojha says:

    Hi, Friends, If TDS on Income deducted on Last Year i.e 2017-18 and Party giving invoice in current Year i.e. 2018-19 and party also not taking provision of income then what treatment will done at party level.

  5. Aamir khan says:

    Hello sir the information you shared is very helpful to me i was just finding the concepts regarding tax entries and thourgh your article my query is complete and again thank for sharing

  6. Ramalinga says:

    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!

  7. Praveen Kumar says:

    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.

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