How to account Income Tax Provision, TDS & Advance Tax

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.

DIPESH SHANTILAL SHAH

Republished with Amendments