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Accounting Treatment of Provision for Income Tax

>> November 28, 2008

Before writing this article , I have studied deeply several books of accounting . Actually this type of provision is needed in Corporate type business . Because in the sole trade and partnership firm there is no treatment of provision for income tax and income tax paid because above two type business level , it is the duty of business man to pay income tax personally . So in above situation if he take any fund from business for paying income tax , it is deemed as drawing or other words we can say that his capital will reduce if you pick some amount for paying any income tax . No other treatment is done in sole trade or partner ship

Now In Case of Company or Corporate
I am giving you full detail of accounting treatment , if you have to do this type of work in any company .

Ist Step
Understanding the meaning of Company . I have already read on it see .
2nd Step
Understanding the meaning of provision of Income tax

In India , we all company pay income tax of previous year income . Means what we earn in last year we have to pay tax on next year that is called assessment year. But Under the law of Income tax , all company have to pay tax in advance .
So without actual earning we starts to estimate earning .
For Example
Suppose company can guess that it will earn RS. 5 crore in this year .
So on this advance guess company make his reserve or provision of income , it may be the 5% or 10% or 15% or 30% on his estimated income. This is called provision for income tax .
Now company Make the voucher entry of this provision by providing amount from profit and loss account
Profit and loss account Debit
Provision for income tax account Credit
After provision or estimated income tax , company submit his advance income tax return to income tax department ,
then pass the following entry
Advance Income tax account debit
Bank Account credit
After one year when income tax department calculate the real income tax by providing the real income position of company in previous year .
You will remember following point
  • Adjustment of actual income tax with provision
Actual income tax will adjust with provision of income tax by passing following adjustment entry
Provision for income tax account Debit
Income tax Account ( Actual after assessment ) credit
  • We must calculate the difference between actual paid tax and ( advance + tds )
If advance and tds is more than actual tax , then income tax department return your excess tax paid
At this time two general entries will pass
1st transfer advance tax and tds to income tax account
Income tax account debit
Advance tax account Credit
Tds account Credit
2nd journal entry will pass for return the amount
Bank account debit
Income tax account credit
If advance and tds is less than actual tax , then income tax department demand more tax from you , and you will pay by following journal entry
1st transfer advance tax and tds to income tax account
Income tax account debit
Advance tax account Credit
Tds account Credit

2nd journal entry will pass for return the amount

Income tax account Debit
Bank account Credit
Next time , I will make all accounts like provision for income tax account , advance income tax account , income tax deducted at source account and income tax account account in tally 9 and publish for you . So be wait .

Indian income-tax law and practice;: Including Income-tax act, 1961, Finance act, 1964, Wealth-tax act, Gift-tax act, The Companies (profits) surtax and Expenditure-tax act

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xyz...,  October 3, 2010 at 9:27 PM  

thank u... got to know the basic treatment of income tax...

Anonymous,  May 14, 2012 at 8:33 PM  

it was helpful....thanx...

Anonymous,  September 30, 2012 at 10:17 AM  

great work...really helpful

Anonymous,  October 1, 2012 at 4:13 AM  

Thanks a lot sir ....It is very helpful

Anonymous,  April 7, 2013 at 10:43 PM  

thank you

Anonymous,  September 23, 2014 at 2:52 AM  

whether interest on income tax be included in the provision for tax account

Anonymous,  February 1, 2015 at 10:22 PM  

it was helpful....thanx...

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