Income Tax Entry For Prior Year

by NARESH
(Canada)

We paid income tax for 2008 in 2009 on filing 2008 return. However no adusting entry or accrual has been booked in 2008 financial statement. How we can correct this in the year 2009?


In 2009 if we make Dr Income tax exp & Cr Bank it will be treated as current year tax expense.

Let me know how can I resolve the issue and oblige.

Thanks, NARESH


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Hi Naresh,

Here's my understanding of how income tax for corporations works.

Normally, before you close your books for the year, you would prepare a journal entry for estimated taxes payable. This allows you to match expenses with revenues for the period. The bookkeeping entry would be:

Debit (increase) Provision for Income Taxes (an expense on your income statement)

Credit (increase) Income Taxes Payable (a currently liability on your balance sheet)



Then, when you pay your estimated taxes, due two months following your fiscal year-end, you would book the following bookkeeping entry:

Debit (decrease) Income Taxes Payable ( a currently liability on your balance sheet)

Credit (decrease) Cash in Bank (a current asset on your balance sheet)




Your corporate tax return is due six months after your fiscal year-end. If your actual tax payable is different from your estimated tax payable calculated a few months earlier, you would reverse your estimate and book your actual taxes due as follows:

Reverse Estimate

Debit (decrease) Income Taxes Payable (a currently liability on your balance sheet)

Credit (decrease) Provision for Income Taxes (an expense on your income statement)


Book Actual

Debit (increase) Income Taxes Expense (an expense on your income statement)

Credit (increase) Income Taxes Payable (a currently liability on your balance sheet)

What nows shows on your current year income statement is the adjustment to actual expense.




If the accrual for estimated taxes was not booked prior to the books being closed, it means your financial statements were not completely accurate. There is nothing you can do about that now ... and the oversight will carryover and affect your current year financial statements.

Your bookkeeping entry when the income taxes due for the prior period are calculated in the current year will reflect the entire amount and would be:

Debit (increase) Income Taxes Expense (an expense on your income statement)

Credit (increase) Income Taxes Payable (a currently liability on your balance sheet)




When you pay the Receiver General, to clear your payable you would book:

Debit (decrease) Income Taxes Payable ( a currently liability on your balance sheet)

Credit (decrease) Cash in Bank (a current asset on your balance sheet)




You will notice that the effect of this kind of oversight is self correcting over a two year period. I have ignored deferred taxes and RDTOH. I hope this helps.






Comments for Income Tax Entry For Prior Year

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Jul 25, 2010
 Failure to Accrue Prior Year Expense
by: Bookkeeping Essentials

Naresh,

I was looking for something else when I came across information on counter balancing errors ... errors that correct themselves over two years.

If the error is found before the books are closed in the second year, the following bookkeeping entry will ensure your current year's expenses are not over stated.

Debit (increase) Retained Earnings* (CAUTION - usually only your accountant should book entries to retained earnings ... so if you make this entry, make sure you let your accountant know.)

Credit (increase) Income Taxes Payable (a currently liability on your balance sheet)


*You record your transaction to retained earnings because your expenses were understated and net income was over stated in the prior year.

If the error is found in the third year, no entry is required as the error is self-correcting.

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