DESKTOP EDITION CLOUD EDITION SERVER EDITION GUIDES FORUM

Handing income tax


#1

How can I insert tax.

The tax type is INCOME TAX the rate is 25 % applied on the profit of the business.
Im not seeing anything like this on The Profit and Lost Statement. By right and according to the accounting rules in my country, we should have the profit before tax and then the net profit: PROFIT- INCOME TAX (25% of the profit)


#2

Just create new expense account in chart of accounts called Income tax expense

Then at the end of the year, you would make a journal entry where you credit income tax liability and debit income tax expense.


#3

Great


#4

Manager does not calculate income tax. The rules in different jurisdictions are far too complex. And Manager is an accounting program, not a tax program. The response @lubos just posted tells you how to handle payment of taxes, but is really only correct if the tax is assessed against the business itself. In most jurisdictions, if the business is a sole proprietorship, the tax is assessed against income of the owner and is not actually an expense of the business. You did not indicate what type organization you have.


#5

Thanks Guys
You are doing well for us.


#6

I apologise for asking, but I just need clarification on this.

In other words one must create the following accounts: -
An “Income Tax” account under “Liabilities”.
An “Income Tax” account under “Expenses”

I do understand the journal entry from the “Liability” to the “Expenses”, but how do one get the amounts into the account under 'Liabilities"?

Do we CT the “Bank” and DT the “Liability” Account with a Journal or do we make a payment from the “Bank” to the “Liability” Account?

Bear in mind that the "Bank Account does not appear as an option when one Journalise, probably because it would be incorrect.


#7

@Kobus, the journal entry between expense and liability account would be made when income tax is accrued (typically the last day of the financial year). You don’t involve bank account since income tax is always paid weeks or months after it is accrued. You would record separate transaction when income tax is actually paid.


#8

I do understand, but as Lamar has said, in our country we pay 25% of the profit.
Some months their would be tax and some not. At the end of the year you wiil pay acc tax.

In the interrim we need to show the money somewhere and show that it is for tax purposes.

The funds is in the Bank account, because you received money from the customers.

One needs to get it out of the bank account to the liability account.


#9

@Kobus you do not need to transfer from Bank Account but you need to create a double entry for the tax amount under Liabilities for Income Tax…


#10

cometomama,
This means
DT Expense Account
Ct Liability Account

This will reflect an amount in the P/L statement reducing the profit and increasing the Liability which shows you still have to pay.

Every month this liability account will increase and an expense will be showed, decreasing the profit.

At the end of the term I am going to pay all this accumalated tax from the liability account by Spending the money from the Bank account. Is this correct?

Is this not reducing your profit twice, once when the expence was taken to the liability account and now when it is actually paid?


#11

Sorry for the stupid question.

After checking it does not seem like that, but I will still have to verify.


#12

No the moment you recognise the tax under expenses, only cash can exhaust it from the books, that why it becomes a liability, in accrual accounting expenses have to be eventually paid when incurred and Income tax is no different.

remember the other expenses reducing profit may have been paid already or will be in your statement of financial position as a liability/obligation, the same applies to tax. so “basically” only cash can really release an obligation.

find out the difference between expenses and payments


#13

By reading all this I still don’t get how to actually record the fact of paying the income tax (in my case - from the company bank account)…


#14

If you read this thread, @serieuxchat, you should know that the answer depends on how your company is organized.


#15

Yes, I read it, and I am a sole proprietor, so the (income) tax is not a real expense (to be subtracted to get the profit), but I would still want to record the fact that I paid it, and I don’t know how…


#16

Did you create an account called Income tax expense? If so, just allocate the tax paid to this expense account as if it’s regular expense.


#17

OK, sole proprietor. @lubos’ response will let you record the expense. But from an accounting perspective, your P&L could be distorted, depending on where you are. Check local tax laws.

In the USA, for example, profit from a sole proprietorship is not reported as an expense of the company, but as personal income of the owner. It is not properly paid from company funds, but from the owner’s funds. Of course, to be able to make the payment, the owner may have to first make a draw from the company, reducing equity. If you record it as a company expense, that would lower the profit of the company for the tax reporting period in which the payment is made, something the tax man might frown upon as an illegal attempt at tax evasion.

Again, check local tax laws and consult an accountant.


#18

If I create an expense account for Income Tax, that would create a circle - because amount profit before tax is determined by subtracting expenses from the income. I would like to first list tax as a liability and then record the fact of paying it from the company bank account (and reducing the liability to zero), and that’s what I cannot figure out how to do.
(Or is this NOT the right way to do it?)


#19

Income tax expense is still an expense. It’s just not tax-deductible expense.

The way many companies handle this is that they set up “multi-step income statement” which will show “net profit before tax”, then income tax amount, then “net profit after tax”. You can setup multi-step income statement under Settings tab.

Or do as @Tut said, allocate the tax payment to your equity account. For sole traders, both methods are acceptable.


#20

@lubos,
I went to “settings” and put “Other Expenses” on its own between Operating Profit and Nett Profit.
I put the Expense “Income Tax” under “Other Expenses”

In other words coming back to the 25% Issue of my country, I can deem the Operational Profit as the Nett Profit before Tax. I manually calculate 25% of the Operational Profit and use that figure as the Tax to be paid. I put this amount under “Other Expenses” Income Tax and I have my Profit before tax and after tax which is now the Nett Profit at the end.