First year Terminal Tax Entry

Testing

Scenario- Re Company's Income Tax

For Year End 2018, company will pay tax on the profit for the first time. There was no provisional tax paid till date i.e. 8th March 2019.

Provisional tax for 2019 is not paid yet.

As per rules 2018 Income tax and 2019 provisional tax can be paid in April 2019.

 

I have following concern

1. Should there be a journal entry on 31/03/2018 showing 2018 income tax liability. 

2. Should there be any entry for 2019 provisional tax before it is actually paid.

3. If 2018 terminal tax is paid within 2019 Financial year, the net profit for 2019 will be reduced thus less tax for 2019. Am I right here.

 

Please let me know if something is not clear above. Thanks

 

 

Mike_James

Hi @Testing, to account for company income tax my suggestion would be:

 

Set up an income tax expense account in other expenses (9-xxxx), and an income tax payable in other ecurrent liabilities. 

 

Any payments of provisional or terminal income tax should be allocated to the payable account (2-xxxx). 

 

When preparing end of year accounts, record a journal for the income tax liability (Dr. income tax expense, Cr. Income tax payable).  In your example, if you have closed 2018 you may need to record the 2018 liability against retained earnings (Dr. Retained Earnings, Cr. Income tax payable); however if you are using the new AccountRight program, you can re-open the year and add a journal debiting the income tax expense. 

 

If your tax payments for any year are more or less than your tax charge, you can subsequently journal the balance back to the income expense account.

 

To answer your specific questions:

1. Ideally yes, and being able to re-open closed years makes this easier

2. No, record provisional tax via Spend Money when paid

3. Not correct, tax payments should be allocated to the tax liability account. The current year tax liability would always be worked out on net profit or loss before income tax expense.