Publish Date: May 18, 2024
In today’s post, we delve into the intricacies of accounting for Income Tax Provision, Tax Deducted at Source (TDS), and Advance Tax. Whether you’re a business owner, a finance professional, or an individual taxpayer, understanding these concepts is crucial for effective tax management and compliance. 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. We dive through the essentials and nuances of these tax components, providing you with actionable insights to optimize your tax strategies.
Definition: Income Tax Provision serves as a cornerstone in financial accounting, representing the estimated income tax liability for the current fiscal period. 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”. Get more insights at : https://laudablelegalsolutions.com/income-tax-return-audit/
Accounting Treatment: This entails computing the anticipated tax expense based on the prevailing tax rates and the entity’s taxable income, ensuring accurate reflection in financial statements.
Importance: Beyond mere compliance, Income Tax Provision aids organizations in prudent budgeting, forecasting, and strategic decision-making, enhancing transparency and accountability.
What is TDS?: Tax Deducted at Source (TDS) embodies a vital mechanism for revenue collection, compelling entities to deduct tax at the source of income generation, thereby ensuring a steady inflow of tax revenue for the government.
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
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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 + intt. 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)
Applicability: TDS finds application across diverse income streams, encompassing salaries, interest, rent, commissions, and more, underlining its pervasive impact on financial transactions.
Compliance Requirements: Entities entrusted with deducting TDS are mandated to remit the deducted tax to the authorities within stipulated timelines, alongside filing periodic TDS returns to uphold statutory compliance.
What is Advance Tax?: Advance Tax mandates taxpayers to pay tax on income earned periodically throughout the financial year, rather than deferring it until year-end. 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.
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Due Dates and Installments: Taxpayers are required to pay Advance Tax in installments spread across predefined due dates, aligning with income accrual and statutory timelines.
Consequences of Non-Compliance: Failure to meet Advance Tax obligations may result in interest and penalties, adversely affecting financial health and compliance status.
Embark on a journey through practical scenarios and case studies, shedding light on the nuanced application of Income Tax Provision, TDS, and Advance Tax in real-world contexts, enabling a deeper understanding of their implications and imperatives.
In this article, I have made an effort to cover a wide range of tax-related subjects in an effort to offer insightful information to those who are active in taxation. Although I have made an effort to provide thorough coverage, I have purposefully avoided going into detail on particular provisions of the Income Tax Act in order to keep things simple. We highly value your input and constructive suggestions regarding this method. For further information feel free to contact Laudable Legal Solutions Expert!
