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Advance tax entry end of the year


What is the procedure for advance tax entry for the year end closing the books in a company.

 

Under the Current Assets :  Advance Tax A/C.  Dr. 10,00,000/-

                                                          To Bank A/C.   Cr. 10,00,000/-

how to reverese the end of the year the same current assets to P&L Account

                                                 Advance Tax A/C.  Cr. 10,00,000/-

                                                     By P&L Account  Dr. 10,00,000/-

 

is it correct way as per accounting standards, after the same add to the total income for the purpose of incometax computation.

 

 

 
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* * * * * *


Accounting for Income-tax

In order to avoid  unnecessary confusion in  accounting  for  income-tax and preparation  of  Cash-flow Statement ( to  arrive at the  Payment  of  Income-Tax,) ,  it is advisible  to maintain   the  following  2 Accounts  separately,  year-wise,    for example., , Advance Tax  ( 2007-08)   Provision for Income-Tax (2007-08) and  continue to maintain the said  Accounts  till  an undisputed  Assesssment is completed.

 

We know that when Advance Tax is paid,  the entry is :

 

a) Advance Tax ( FinYear)    Dr

        To Bank.   

 

    Income-tax deducted at source  from  payments received  by us is  also accounted         as above.

 

b) Similarly, when  Provision  for Income-tax is made at the end of the year , the    entry is  :  

 

     Profit  & Loss A/c  Dr 

       To Provision  for Income-Tax ( Fin Year)

 

How do we square up  the Accounts in (a) and (b) above  ?    The following assumptions are made  for easy understanding  under  different situatioins :     

 

I.  Fin Year  2004-05  and Asst Year  2005-06  : ASSESSMENT COMPLETED  IN FY 2007-08.

 

Excess  Advance tax paid, but Short provision made :

 

(A)        Advance Tax paid is  Rs. 100/-

(B)           Provision  for Tax  is  Rs. 85/-

(C)        Assessed & undisputed Liability   is Rs. 90/-

 

 Journal  Entries  in the Financial  year  2007-08 is :

 

a)    Profit  & Loss Account      Dr               05     

        To provision for Tax  ( FY-2004-05)                05

   ( Being the  provision  for  IT for the year FY2004-05  short provided earlier   now   made up)

 

 

b)   Provision  for  I T (FY2004-05)   Dr.      90   

      IT Refund Receivable                 Dr         10

         To Advance Tax(FY20004-05)                       100

 

 On receipt of  Refund Order  from IT Department :

c)     Bank A/c Dr       10

       To IT Refund Receivable     10  

  II.  Fin Year  2004-05  and Asst Year  2005-06 ASSESSMENT COMPLETED  IN FY 2007-08.

 

 Excess  Advance tax paid, and excess  provision is also  made

 (A)  Advance Tax paid is  Rs. 100/-

(B)   Provision  for Tax  is  Rs. 110/-

( C) Assessed & undisputed Liability   is Rs. 95/-

Journal Entries are :

 

a)     Provision for I-T(FY2004-05)                          110

        IT Refund Receivable                                           5

     

        To Advance Tax(2004-05)                                                        100

        To  Provision for IT  no longer required withdrawn                     15

 

b)    Provision for IT 

       No longer required withdrawn      Dr              15

 

            To P  & L Account                                          15

 

III.  Fin Year  2004-05  and Asst Year  2005-06 ASSESSMENT COMPLETED  IN FY 2007-08.

 

Short  Advance tax paid, and excess  provision is   made

 

A)  Advance Tax paid is  Rs. 100/-

(B)   Provision  for Tax  is  Rs. 130/-

( C) Assessed & undisputed Liability   is Rs. 120/-

 

 Journal Entries are :

 

a)   Provision for IT-2004-05         Dr           130

         To Advance  Tax (2004-05)                                          100    

         To IT Payable     (2004-05)                                             20

         To  Provision fo IT  No longer required withdrawn          10

 

 

 b) )   Provision for IT 

         No longer required withdrawn                   10

 

            To P  & L Account                                              10

 


 

IV.  Fin Year  2004-05  and Asst Year  2005-06 ASSESSMENT COMPLETED  IN FY 2007-08.

 

 

 Short  Advance tax paid, and short   provision  for IT is   made

 

(A)  Advance Tax paid is  Rs. 100/-

(B)   Provision  for Tax  is  Rs. 90/--

( C) Assessed & undisputed Liability   is Rs. 130/--

 

Journal Entries are :

 

a)    Profit  & Loss A/c Dr       40

       To Provision for IT-(2004-05)        40

 

 

 

b)   Provision for IT(2004-05)    Dr    130

       To  Advance Tax  (2004-05)                     100

      To  IT payable  (2004-05)                            30

 

 

c)     IT Payable A/c Dr       30

          To Bank                               30

 

 


Total thanks : 4 times

 
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ACA M.Com (Senior Consultant in Capgemini Business Services India Ltd.)

Thanx for the journal entries.

 
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Sr.Acc.Splist-DuPont


I have one query!

Once we file our income tax return, advance tax is no longer available as an asset for us. The amount of advance tax is adjusted against the provision of income tax, thereby closing both the asset (advance tax) and the liability(provision for tax)

In this background, I feel that the treatment suggested by Harpreet may not hold good in all cases!

The ideal journal entry would be passed at the time of filing the return of income as follows:

Provision for Tax A/c   Dr.

   To Advance Tax A/c    

   To Cash/ Bank A/c (in case of self-assessment tax paid)

(or)

Provision for Tax A/c              Dr.

Income Tax (fin. year) A/c.    Dr.

    To Advance Tax A/c (in case the advance tax paid is more than the provision for tax)

The income tax (fin. year) A/c represents the income tax receivable from the department as refund).

Hope my presentation is right!!! 

 
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Be Patient, Live Life


Originally posted by : Aninda Chatterjee

Thanx for the journal entries.

 
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Sr. Manager


Hi All I am of the opinion that the entires by Harpreet is correct, it is always better to have your income tax liablity and advance tax seprately till the time assessment is completed.

 
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Completely agree with Harpreet. It is prudent way of accounting for Income tax for the journal entries presented. Also, it depicts the clear picture to the stake holders from the taxation point of view.
 

 
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I have a query..

Y advance tax of previous yr reflects in current yr..as per harpreet eg:fin yr 2004 to 2005 & 2005 to 2006 reflects in 2007 y it is so??

 
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hi riya

that's because assessment got completed in FY 07-08

so relevant provisions and advance tax keeps showing in balance sheet till the assessment relating thereto is completed.

 

regards

 
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I think so it should be shown on Net basis because it is not necessary for every year assessment order

will be done.

 
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