Forums
Back
Journal entry explanation for provision for tax
Accountancy
In this entry Profit and loss acc debit To provision for tax acc When provision for tax is a liability then how can it be transferred to a profit and loss account?need explanation behind this posting
Answers (12)
Hai Iam Anas
Tax payment is an expense. Provision for such expense is created by taking profit from profit and loss account. That is P&l a/c is debited and provision is credited. Provision should have credit balance and shown liability side of balance sheet.
But if u look at the ledger of provision for tax only on the credit side there would be pnl ac and on the debit it would be blank right?how would you balance the book then?
CA Suraj Lakhotia Admin
Entry for expense Income Tax Expense To Provision Then P&L To Income tax expense Payment Provision To Bank
So then no need for pnl to provision for tax entry?
Thread Starter
Gokul NathBut if u look at the ledger of provision for tax only on the credit side there would be pnl ac and on the debit it would be blank right?how would you balance the book then?
It'll be balanced by payment Of tax by various Names as TDS , advance tax and Self assessment tax
Manoj Raj
It'll be balanced by payment Of tax by various Names as TDS , advance tax and Self assessment tax
Self assessment tax is next year entry and it won't come in first year
Thread Starter
Gokul NathSelf assessment tax is next year entry and it won't come in first year
Advance tax will be paid in current year. Account will be balanced only on final tax assessment
Thread Starter
Gokul NathSo then no need for pnl to provision for tax entry?
If you combine first two entry its same.
CA Suraj Lakhotia Admin
If you combine first two entry its same.
So we post a combined entry for instead of 2 entries .is it done for presentation purposes or any other reason is there to post it as 1 entry?
Manoj Raj
I'm not saying it'll be balanced in same financial year. At the end of payment of tax it will be balanced in provision account. Until it'll have closing balance
Ya it will be in the balance sheet as a payable
Provision for Tax: The provision for tax is an estimate of the tax liability that a company expects to pay for a particular financial period. It is a liability because it represents an obligation to pay the government in the future. Profit and Loss Account: The Profit and Loss (P&L) Account reflects the company's revenues and expenses for the financial period, ultimately showing the net profit or loss. Accounting Entry: Profit and Loss Account (Dr) To Provision for Tax Account (Cr) Recognition of Tax Expense: When the company incurs an expense related to income tax, it needs to recognize this expense in the Profit and Loss Account. This ensures that the tax expense is matched with the revenues of the same period. Creation of a Liability: The credit to the Provision for Tax Account creates a liability on the balance sheet. This liability represents the amount the company expects to pay in taxes. Example: Assume a company estimates that it will owe ₹50,000 in taxes for the financial year. Journal Entry: Profit and Loss Account Dr ₹50,000 To Provision for Tax Account ₹50,000 Explanation: Debit to Profit and Loss Account: This entry records the tax expense in the P&L Account, reducing the net profit for the year by ₹50,000. Credit to Provision for Tax Account: This entry creates a provision (liability) for the tax expected to be paid. It shows that the company has an obligation to pay ₹50,000 in taxes in the future. When the company actually pays tax - Provision for Tax A/c Dr. To Bank A/c In some cases the companies pay advance tax, in which case the entry would be Advance Tax A/c Dr. To Bank A/c Ultimately the provision for tax and advance tax account would be netted off.