NANDURI RAVI SURYA NARAYANA MU (ACCOUNTANT) (194 Points)
19 July 2010What is the procedure for advance tax entry for the year end closing the books in a company.
Under the Current Assets : Advance Tax A/C. Dr. 10,00,000/-
To Bank A/C. Cr. 10,00,000/-
how to reverese the end of the year the same current assets to P&L Account
Advance Tax A/C. Cr. 10,00,000/-
By P&L Account Dr. 10,00,000/-
is it correct way as per accounting standards, after the same add to the total income for the purpose of incometax computation.
Harpreet
(* * * * * *)
(1670 Points)
Replied 19 July 2010
Accounting for Income-tax
In order to avoid unnecessary confusion in accounting for income-tax and preparation of Cash-flow Statement ( to arrive at the Payment of Income-Tax,) , it is advisible to maintain the following 2 Accounts separately, year-wise, for example., , Advance Tax ( 2007-08) Provision for Income-Tax (2007-08) and continue to maintain the said Accounts till an undisputed Assesssment is completed.
We know that when Advance Tax is paid, the entry is :
a) Advance Tax ( FinYear) Dr
To Bank.
Income-tax deducted at source from payments received by us is also accounted as above.
b) Similarly, when Provision for Income-tax is made at the end of the year , the entry is :
Profit & Loss A/c Dr
To Provision for Income-Tax ( Fin Year)
How do we square up the Accounts in (a) and (b) above ? The following assumptions are made for easy understanding under different situatioins :
I. Fin Year 2004-05 and Asst Year 2005-06 : ASSESSMENT COMPLETED IN FY 2007-08.
Excess Advance tax paid, but Short provision made :
(A) Advance Tax paid is Rs. 100/-
(B) Provision for Tax is Rs. 85/-
(C) Assessed & undisputed Liability is Rs. 90/-
Journal Entries in the Financial year 2007-08 is :
a) Profit &
To provision for Tax ( FY-2004-05) 05
( Being the provision for IT for the year FY2004-05 short provided earlier now made up)
b) Provision for I T (FY2004-05) Dr. 90
IT
To Advance Tax(FY20004-05) 100
On receipt of Refund Order from IT Department :
c) Bank A/c Dr 10
To IT Refund Receivable 10
II. Fin Year 2004-05 and Asst Year 2005-06 ASSESSMENT COMPLETED IN FY 2007-08.
Excess Advance tax paid, and excess provision is also made
(A) Advance Tax paid is Rs. 100/-
(B) Provision for Tax is Rs. 110/-
( C) Assessed & undisputed Liability is Rs. 95/-
Journal Entries are :
a) Provision for I-T(FY2004-05) 110
IT Refund Receivable 5
To Advance Tax(2004-05) 100
To Provision for IT no longer required withdrawn 15
b) Provision for IT
No longer required withdrawn Dr 15
To P & L Account 15
III. Fin Year 2004-05 and Asst Year 2005-06 ASSESSMENT COMPLETED IN FY 2007-08.
Short Advance tax paid, and excess provision is made
A) Advance Tax paid is Rs. 100/-
(B) Provision for Tax is Rs. 130/-
( C) Assessed & undisputed Liability is Rs. 120/-
Journal Entries are :
a) Provision for
To Advance Tax (2004-05) 100
To IT Payable (2004-05) 20
To Provision fo IT No longer required withdrawn 10
b) ) Provision for IT
No longer required withdrawn 10
To P & L Account 10
IV. Fin Year 2004-05 and Asst Year 2005-06 ASSESSMENT COMPLETED IN FY 2007-08.
Short Advance tax paid, and short provision for IT is made
(A) Advance Tax paid is Rs. 100/-
(B) Provision for Tax is Rs. 90/--
( C) Assessed & undisputed Liability is Rs. 130/--
Journal Entries are :
a) Profit &
To Provision for IT-(2004-05) 40
b) Provision for IT(2004-05) Dr 130
To Advance Tax (2004-05) 100
To IT payable (2004-05) 30
c)
To Bank 30
HARI SHANKER KUMAR
(Sr.Acc.Splist-DuPont)
(164 Points)
Replied 01 August 2011
I have one query!
Once we file our income tax return, advance tax is no longer available as an asset for us. The amount of advance tax is adjusted against the provision of income tax, thereby closing both the asset (advance tax) and the liability(provision for tax)
In this background, I feel that the treatment suggested by Harpreet may not hold good in all cases!
The ideal journal entry would be passed at the time of filing the return of income as follows:
Provision for Tax A/c Dr.
To Advance Tax A/c
To Cash/ Bank A/c (in case of self-assessment tax paid)
(or)
Provision for Tax A/c Dr.
Income Tax (fin. year) A/c. Dr.
To Advance Tax A/c (in case the advance tax paid is more than the provision for tax)
The income tax (fin. year) A/c represents the income tax receivable from the department as refund).
Hope my presentation is right!!! 
GAUTAM DEY
(Be Patient, Live Life)
(17309 Points)
Replied 02 August 2011
| Originally posted by : Aninda Chatterjee | ||
 |
Thanx for the journal entries. |
 |
Prasad
(Sr. Manager)
(617 Points)
Replied 02 August 2011
SVSHAH
(CA Final)
(122 Points)
Replied 12 August 2011
Completely agree with Harpreet. It is prudent way of accounting for Income tax for the journal entries presented. Also, it depicts the clear picture to the stake holders from the taxation point of view.
riya rao
(Student CA IPC / IPCC)
(23 Points)
Replied 26 September 2013
I have a query..
Y advance tax of previous yr reflects in current yr..as per harpreet eg:fin yr 2004 to 2005 & 2005 to 2006 reflects in 2007 y it is so??
Shivani
(Learner)
(1881 Points)
Replied 03 October 2013
hi riya
that's because assessment got completed in FY 07-08
so relevant provisions and advance tax keeps showing in balance sheet till the assessment relating thereto is completed.
regards
CA Mitesh N Kothari
(9821662799)
(391 Points)
Replied 05 October 2013
I think so it should be shown on Net basis because it is not necessary for every year assessment order
will be done.
Purva Doshi
(2 Points)
Replied 23 August 2020
Isn't there a mistake in situation 2 ? I think the journal entry should be..
1) IT refundable A/c Dr. 5
Provision for tax A/c Dr. 95
To Advance tax 100
2) Provision for tax a/c Dr. 15
To P/l 15
Please correct me, if I am wrong.
Indira Priyadarsini Kota
(Practice)
(590 Points)
Replied 20 January 2021
khushi goyal
(2 Points)
Replied 20 July 2021
why advance tax is shown under the title short term loans and advances
yasaswi gomes
(My grammar is 💯 good I)
(7290 Points)
Replied 21 July 2021
Because tax is claimed or reversed every year to recover profits
CAclubindia
