Financial Accounting Income Tax & Dividend

By Sudha Agarwal
Chartered Accountant

Contents


Accounting for Income Tax payment, Tax Provision and Advance tax Accounting for Dividend payment, Proposed Dividend and Interim Dividend

Income Tax


After accounting for depreciation and interest, income tax is accounted for to derive Profit After tax (PAT) Profits on which tax is payable is taxable profits and is calculated as per the provisions of Income tax Act Every company or businessman needs to pay Advance tax each quarter, though actual amount of tax can be calculated only when books of accounts are closed for the accounting period Though taxes are paid and tax returns are filed within stipulated time, income tax officer will scrutinise and assess the tax payable. This process takes time and until then the company will not know the exact tax liability

Accounting for Income Tax



Accounting for income tax takes into account the following 3 stages : i) Payment of advance tax ii) Determination of tax liability by company from its books of accounts and making provision for the same and payment of difference, if any, between advance tax and tax computed on closure of books iii) Completion of assessment by Income tax officer

Accounting for Income Tax



Advance tax paid for Financial Yr 2010-11(Asst yr 2011-12) is Rs 3,50,000 Advance tax a/c Dr 3,50,000 (for Asst yr 2011-12) To Bank a/c Advance tax will appear under Loans and Advances in Balance Sheet Tax liability after preparation of P&L a/c for year ending 31st March 2001 is Rs 3,42,500 Profit and Loss account Dr 3,42,500 To Provision for Income tax a/c (for Asst year 2011-12) Tax liability will appear as an expense in Profit and Loss a/c and Provision for income tax will be shown as a Current liability in Balance Sheet. Another method could also be to set off advance tax and provision pertaining to same Asst year and take only net amount either to the liability or asset side of Balance Sheet

Accounting for Income Tax



If assessment is completed in Dec 2011 and tax liability arrived at by ITO is Rs 3,60,000 the following entries will be passed in the P&L for the year ending 31st March 2012 :Profit and Loss appropriation a/c Dr 17,500 (3,60,000 -3,42,500) To Provision for Income tax (Asst yr 2011-12) Since assessment is completed, the advance tax a/c will be closed by transfer to Provision a/c. Provision for Income tax a/c Dr 3,50,000 (Asst yr 2011-12) To Advance tax (Asst yr 2011-12) Short payment of tax needs to be paid Provision for income tax Dr 10,000 (Asst yr 2011-12) To Bank

Accounting for Income Tax



Thus Balance Sheet as on 31st March 2012, will not list any items pertaining to Asst yr 2011-12. The ledger accounts are given below :Advance tax (Asst yr 2011-12) Dr Date 1.4.11 Particulars To Balance b/d Rs 350,000 31.3.12 350,000 By Provision for Income tax a/c (Asst yr 2011-12) 350,000 350,000 Date Particulars Cr Rs

Provision for Income tax (Asst yr 2011-12) Dr Date 31.12.11 Particulars To Bank To Advance tax (Asst yr 201112) Rs 10,000 Date 1.4.11 Particulars By balance b/d By Profit and Loss Appropriation a/c Cr Rs 342,500

31.3.12

350,000 360,000

31.3.12

17,500 360,000

Dividends


Dividends may be defined as share of profits payable to each shareholder Company may pay dividend out of profits of current year or undistributed profits of previous year Directors of the company recommend the % of dividend payable on equity shares, which must be applied on paid-up capital Shareholders in the annual general meeting pass a resolution adopting the recommendation

Accounting of Dividend


Dividend proposed by Directors is termed as Proposed Dividend till the time it is adopted by the shareholders. The entry for the same isProfit and Loss Appropriation a/c Dr To Proposed Dividend a/c Proposed dividend will be classified as a provision and shown in the liability side of Balance sheet Directors can also declare interim dividend between 2 annual general meetings. When interim dividend is paid the entry is Interim Dividend a/c Dr To Bank a/c

Thank You