Accounting and Journal Entry for Income Tax

Journal Entry for Income Tax

Income tax is a form of tax levied by the government on the income generated by a business or person. Accounting and journal entry for income tax is done in a distinct way for different types of business establishments i.e. Sole Proprietorship, Partnership, and Private Limited Company.

Private limited companies have a comparatively complex structure for the accounting of income tax which is not covered in this article.

Journal Entries in Case of – Sole Proprietorship

For a Sole Proprietor, income tax is not an expense incurred to generate revenue hence it is not treated as an expense to be paid out of profits. In this case, income tax is treated as a personal expense resulting in drawings from the business concluding to a reduction of capital.

Journal entry for income tax in case of a sole proprietorship contains 2 steps as follows;

Step 1 – When Tax is Paid

(Paying tax via the bank)

Step 2 – When Adjustment of Income Tax is Done

(Adjusting income tax as drawings)

Journal Entries in Case of – Partnership Companies

For a Partnership Firm, income tax is payable by the business itself and not individually by the partners. In this case, income tax is reduced from the net profits. It is shown in the profit and loss appropriation account.

Journal entry for income tax in case of a partnership firm includes debiting the Income Statement/P&L Account.

Short Quiz for Self-Evaluation

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