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Accounting for refunds

H S Rajashree (MBA in Finance) (221 Points)

02 July 2009

Please update what will be the entries when a refund of income tax has been received.

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25 Replies

Sunali (Learner) (1317 Points)
Replied 02 July 2009

Income Tax Refund is generally credited to capital account and Interest received on refund is liable to tax under the head 'Income from other sources' .

The entry will be:-

Bank Dr.

To Capital A/c

Jyoti Malik (ACCOUNTANT) (2644 Points)
Replied 02 July 2009

yes, Sunali is right.

RAJU (LEARNER) (1089 Points)
Replied 02 July 2009

Ya she is right if the Income-tax was debited to capital account in the earlier period and was not shown in current assets.

(Guest)

Hi H. S.,

Yupp Sunali is correct but if tax was not debited to capital ac. earlier then refund shall be routed through P/L ac. or Revenue reserve.

RAMANJU (here to updating the knowledge) (485 Points)
Replied 02 July 2009

Hi, You are all wrong!!! The refund entry will be as follows: Bank Acc Dr. XX To TDS Receivable A/c or Advance tax a/c XX To Interest on Refund XX

RAJU (LEARNER) (1089 Points)
Replied 02 July 2009

Sir can you explain us why we are wrong. We have stated that if it is shown in current assets (that is TDS, Advance tax) it should be credit to these accounts and if it was debited to drawings when paid, the same should be credited to capital.

RAJU (LEARNER) (1089 Points)
Replied 02 July 2009

Please note that recognition of interest has been clearly clarified by Ms. Sunali

RAMANJU (here to updating the knowledge) (485 Points)
Replied 02 July 2009

Pls don'nt mix up the TDS receivable a/c or advance tax paid account with capital account eha! TDS receivable account should be kept separatly and at the time of refund it should be reversed. hope you are clarified. If you have any other method, welcome

RAJU (LEARNER) (1089 Points)
Replied 02 July 2009

Sir,

I believe, It is not incorrect to debit TDS/Advance tax (refundable) to drawings account in the year of payment in case of proprietory firms since the liability to tax is w.r.t status as individual. Most of the people do make payment of advance tax from SB account in which case it would not have been reflected in the balance sheet of firm.

RAMANJU (here to updating the knowledge) (485 Points)
Replied 02 July 2009

For example you are firm of CA, you bill a client for Rs. 50,000 and accordingly the payee deducted tax at source and pay you net only. The entry will be Bank A/c dr. 40000 TDS Receivable a/c 10000 To Professional fee a/c 50000 Now, when you get refund, the entry will be as said above.

RAJU (LEARNER) (1089 Points)
Replied 02 July 2009

Yes you are right if it is a Partnership firm. We had considered in our replies, the possibilities of entries to be made in case of proprietory concern also.

RAMANJU (here to updating the knowledge) (485 Points)
Replied 02 July 2009

Pls give some illustrative entries in case of proprietory concerns.

RAJU (LEARNER) (1089 Points)
Replied 02 July 2009

Mr. Ramanju I have clearly explained what I meant. Please refer the illustration belows for your understanding;

1) Payment of Advance Tax from SB Account: No entry in the proprietory concern,

On receipt of refund: Dr. Bank, Cr. Capital, Cr. Interest, if deposited in firm. If deposited in SB Account: Interest income to be taken to statement of total income directly

2) Payment of Advance tax from Firm: On Payment - Dr. Advance Tax, Cr. Bank. At the year end: Dr.Capital, Cr. TDS. Entry for receipt of refund is same as above.

3) TDS: Dr. TDS, Dr. Bank, Cr. Interest, At the year end: Dr. Capital, Cr.TDS. Refund entry same as above.

praveen (Chartered Accountant) (6971 Points)
Replied 02 July 2009

Excuse me for breaking your discussions

What we do at the end of the year is to pass a provision entry for income tax payable. Then adjust it with advance tax and tds. the balance if it is payable then shall be maintained as payable if the amount to our credit is more then we shall show it as refund receivable. when the amount is recd or paid it shall be adjusted. if there is any amount recd in excess of refund receivable already created we shall treat it is as income.

Hope this convinces dharmaraju