Journal Entry for Income Tax Paid

The income tax is paid after the year-end closing which depends on the tax law in each country or state.

income tax expense is an important part of business accounting. This type of expense represents the taxes that a company must pay based on the amount of profit. The amount of income tax expense can vary greatly from one company to another, depending on a number of factors, such as the company’s profitability, tax rate, and the tax laws of that country.

Income tax expenses can have a significant impact on a company’s bottom line. If a company is profitable, it will typically have to pay income taxes. This can reduce the amount of profit that the company reports on its financial statements. On the other hand, if a company is not profitable, it may be able to reduce its income tax expense by taking advantage of tax laws that allow losses to be carried forward to future years.

Income tax expense is also affected by a company’s accounting methods. For example, if a company uses the accrual basis of accounting, it will recognize income tax expense when it earns revenue. If the company uses the cash basis of accounting, it will recognize income tax expense when it actually pays the taxes.

Income tax expense can also be affected by a number of other factors, such as the amount of debt a company has and the way in which it accounts for depreciation.

Income tax is the expense that incurs in the year, but it will be paid in the next period. So the company has to record this expense on the income statement before the year-end. As the cash is not yet paid, company has to record the liability at the year-end. When the company makes the payment, we have to make a journal entry for income tax paid. It reverses the income tax liability and cash paid.

Journal Entry for Income Tax Paid

If we want to know the journal entry of income tax paid, we have to understand the income tax expense.

First, we have to look at the recording of income tax expenses at the end of accounting period. At the year-end, accountant calculates the income tax expense base on the taxable profit and tax rate. They record this transaction to prepare the completed income statement which requires including all expenses and incomes.

The journal entry is debating income tax expense and credit income tax liability.

The income tax expense will be included in the income statement. The income tax liability will record as the current liability on the balance sheet.

After year-end closing, the company requires to make payment to the tax authority. The time frame can be different depending on the country. It should be around 3 months after the year-end.

The journal entry is debiting income tax liability and credit cash.

The entry is made to reverse the income tax liability and reduce cash paid.

Example

Company ABC is preparing the annual financial statements. The accountant has calculated the income tax of $ 5,000 and prepared to record it in the income statement. One month after the year-end, the company has paid the income tax expense to the government. Please prepare the journal entry for income tax paid.

At the end of the year, company has to record income tax expenses to include them on the income statement.

The journal entry is debiting income tax expense $ 5,000 and credit income tax liability $ 5,000.

One month later, company needs to record the income tax paid when the company makes a payment to the tax authority.

The journal entry is debiting income tax liability $ 5,000 and credit cash $ 5,000.