Financial Statements

Accounting Treatment relating to Income Tax is as follows:

(1) At the time of paying advance tax:

Advance Income Tax Paid A/c Dr.

To Bank A/c

(2)At the time of making provision for Income tax Liability:

Profit & Loss A/c Dr.

To Provision for Income Tax A/c

From here onwards you will have to make proper assessment year wise reconciliation of both the accounts ie Advance Income Tax Paid A/c & Provision for Income Tax A/c. This is to be noted that every Assessment Year is separate in Income Tax. (This is to be noted that in case of an assessee who is not in default Advance Tax deposited will always be greater or equal to Provision for Income Tax. Provision for Income Tax is nothing but current Tax as per the AS-22.)

(3) At the time of making self assessment payment, the entry will be same as in (1) but the narration will mention that it is a self assessment tax for the AY 200X-XX.

(4) when the Assessment gets completed there are few situations arises:

when our income is assessed without making any dis-allowance & charging any interest :

Provision for Income Tax A/c Dr.

To Advance Income Tax Paid

(with the amount of Provision for Income Tax for the AY 200X-XX)

when our income is assessed without making any disallowance but after charging interest eg u/s 234 : In this case the AO will issue the Demand letter u/s 156 for the payment of tax calculated under assessement , because as per rule tax paid is first adjusted towards the amount of interest due. He can also adjust this amount with any other refund which might due to you in respect of any other Assessment Year.

Along with the entry passed under situation (a) , the following entries will be passed

Interest Paid - Others A/c Dr.

To Bank A/c

In case it is adjusted with the refund of any other Assessment Year, then the entry will be:

Interest Paid - Others A/c Dr.

To Advance Income Tax Paid

In this case you must make it sure that the narration clearly mentions the assessment year of which refund is adjusted against the demand. Also you will have to make proper adjustment in your reconciliation of Advance Income Tax A/c & Provision for Income Tax A/c in concerned AY.

(c) When Income is assessed with some dis-allowance & Interest payable:

This means that we have to pay tax demanded by AY.

Income Tax Provision A/c Dr.

To Advance Income Tax Paid A/c

(with the amount provided for the respective Assessment Year)

Income Tax Provision for earlier years - Written Back A/c Dr.

Interest paid - Others A/c Dr.

To Bank A/c (if paid through Bank)

To Advance Income Tax Paid A/c (if adjusted by AO with refund of other AY)

(with the amount of Additional Income Tax Liability arises on assessment & Interest payable )

# This is to be noted that refund is not an Income from the Assessee point of view, However the interest received on refund is indirect income to be shown under other incomes.

In (ii) Case, if there is interest on refund which is also adjusted with the tax demand then the entries will be:

Income Tax Provision for earlier years - Written Back A/c Dr.

Interest paid - Others A/c Dr.

To Bank A/c (if paid through Bank)

To Advance Income Tax Paid A/c (if adjusted by AO with refund of other AY)

To Other Income (with amount of Interest recd. on refund which is adj. against tax demand)

(with the amount of Additional Income Tax Liability arises on assessment & Interest payable )

Note:- This is to be noted that in case tax on returned income is not equal to Current Tax Provision for the year, then you will have to pass the following entries to make it equal to tax on returned income (Reason for inequality may be the mistake or error that might have occurred at the time of making provision).

Case (a) - When tax on returned income is more:

It means you have made less provision for the Assessment Year, now you have to make the remaining provision. Now the entry will be:

Income Tax Provision for earlier years - Written Back A/c Dr.

To Provision for Income Tax A/c

Case (b) - When tax on returned income is less:

Just pass the reverse entry as passed in case (a)

Prepare them Monthly. Most of the time financial are prepared by your in-house bookkeeper, CPA or chartered accountant.

Don't ever prepare them...Learn to use them monthly. Preparing them sounds like you are going to present them as your trusted outside adviser like your acct does for you. Use them on a monthly basis to tell you if your GPM pricing formulas are in line. Use them to calculate and forecast labor and material costs. Use them to calculate inventory turns. Use them to tell you what working capital is available to you and much, much more.

The bottom line is that you don't have to be a financial guru to do this.

Find someone that can teach you these "Business" principals and your business will thrive.

For further detail follow the related link.