Why is the Supplier Debited for Withholding Tax in Purchases?

[Esllam_Rashwan]

In this scenario, the main issue lies in how withholding tax is recorded, as it affects the supplier’s account, reducing its balance below the actual invoice amount. Based on your explanation, withholding tax should be recorded as a separate liability, not as a deduction from the supplier’s account. Below is the correct process:

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Expected Scenario:

1. Invoice Creation:

   • Supplier Account (Credit): 10,000
   • Expenses/Purchases (Debit): 10,000

2. Withholding Tax Recording:

   • Withholding Tax Liability (Credit): 500
   • Withholding Tax Expense (P&L - Debit): 500

3. Payment Settlement:

   • Bank Payment (Credit): 10,000 (full amount paid to the supplier)
   • Withholding Tax Liability is settled later when the tax declaration is submitted.

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Correct Accounting Entries:

Upon Invoice Creation:

• Accounting Entry:
  • Debit:
    • Expenses/Purchases = 10,000
  • Credit:
    • Supplier Account = 10,000

For Withholding Tax Deduction:

• Accounting Entry:
  • Debit:
    • Withholding Tax Expense = 500
  • Credit:
    • Withholding Tax Liability = 500

During Payment Settlement:

• Accounting Entry:
  • Debit:
    • Supplier Account = 10,000
  • Credit:
    • Bank = 10,000

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Current Problem:

• The software records withholding tax as a direct deduction from the supplier’s account, resulting in the supplier’s balance showing less than the invoice amount (9,500 instead of 10,000). This is incorrect because the supplier should reflect the full invoice value (10,000).

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Proposed Solution:

1. Record withholding tax as a separate liability (Liability account) rather than deducting it directly from the supplier’s account.
2. The supplier’s account should display the full invoice amount (10,000), unaffected by the withholding tax.
3. Withholding tax in the liability account and settle it later when remitting the tax to the authorities.