AA-43

All Respected Members,

hope you all will be fine with good health and doing well.

please educate me on following:

one of my friend told me that their tax consultant asked him to take tds as income tax expense and less it from gross profit same like indirect expenses.

He did the same. he created ledger income tax expense under indirect expense group and adjust it with tds account which was in assets side of balance sheet.

but when he check the tax liability it is more than tds deduction.

he is facing this issue that when he adjusted income tax expense account as indirect expense. a profit value come out but when he found that tax liability is more than tds and he would have to deposit admitted tax. he deposited admitted tax payment but upon this payment profit reduce more from earlier whereas he filed the return with tds of earlier.

please educate how should he take entry to reduce more Profit amount due to short tax payment.

thanks in advance for your precious time and efforts

Great question! Your friend’s tax consultant’s approach seems to have caused some confusion. Let me clarify the correct accounting treatment of TDS and Income Tax expense and how it affects Profit & Loss:

Key Points:

TDS (Tax Deducted at Source) is not an expense. It is an asset (advance tax paid to government on your behalf).
- Ledger Group: Current Assets → TDS Receivable / Tax Deducted at Source
Income Tax Expense is the actual tax liability calculated on your profits after considering all deductions, including TDS.
- Ledger Group: Indirect Expenses → Income Tax Expense
Profit before Tax (PBT) is calculated before deducting Income Tax Expense.
- Income Tax Expense is deducted after arriving at PBT to calculate Profit after Tax (PAT).

Correct Way to Record:

When TDS is deducted:

Debit TDS Receivable (Asset)
Credit Bank/Cash or Tax Authorities (Liability)

This reflects the tax paid on behalf of the business.

At the end of the year when calculating income tax liability:

Calculate Income Tax Expense based on taxable profits.
Record:
- Debit Income Tax Expense (Indirect Expense)
- Credit Income Tax Payable (Current Liability)

When TDS is available:

Debit Income Tax Payable (Liability)
Credit TDS Receivable (Asset)

This reduces the tax liability because TDS is already paid.

If there is shortfall in tax payment (Admitted Tax):

Debit Income Tax Expense (additional tax liability)
Credit Bank (on payment)

Why the Profit Changed More Than Expected:

If your friend treated TDS as an expense, it reduced the profit wrongly at the expense stage. But actually, Income Tax Expense should be charged separately after profit before tax, so the impact on profit is correctly shown.

When he paid additional tax, it further reduced profit because it’s part of Income Tax Expense.