A company’s taxable income is the basis for income tax payable (ITPL), which appears on company’s balance sheet (B/s).
A company’s income tax expense (ITE) appears in the income statement,(I/s) and ITE= ITPL ± DTL/DTA.
ITPD - Income tax paid (the actual cash outflow) reduces the income tax payable, which is carried on in the B/s as liability
- Why would ITPL & ITE appear simultaneously? One in B/s & the other in I/s? Say, there was no DTA/DTL. So, ITE = ITPL = 10000 (say). But should not only one of the two appear? If I am booking the expense (ITE) in I/s, then there should be no ITPL on B/s?
Or may be I get this? As the entry should be??
(1) I/s (Profit & loss account) debited to ITE 10000,
(2) ITE debited to ITPL 10000…
In which case, ITE appears in I/s & ITPL stands as liability in B/s
And when income tax is paid in cash, the liability is struck off the books.
Every year when you make taxable profits, you have an income tax expense that then is payable to the taxman.
If you want your debits and credits, then its:
DR: Income tax expense
CR: Income tax payable
The reason there is a liability set up in the balance sheet because you never pay off the taxman straight away when the expense is accrued, that comes a bit later.
Then when you physically hand over the cash to the taxman, you reverse out the payable as such:
DR: Income tax payable (to reduce it)
CR: Cash (to reduce cash as you’re paying it out)
Does that make sense?
O ya! that’s what i wrote there you slithery slob, LOL, Thanks for the response!
What? What exactly are you trying to get at here?
No man! I did not mean anything. It was just in jest! I was confused about the entry, so I wrote down what I thought could be the accounting entries of taxes payable & paid. You confirmed that and removed my doubts. So Thanks
PS - If you see, your entries and mine are same. Just that I put one more where the expense is finally taken to P/L