Journal Entry for Income Tax Expenses

Income tax expense is the amount a company pays to its government for conducting business and earning profits. This expense represents the taxes the company must pay on its taxable income, minus any available credits or deductions. The rate that applies to a particular company can vary depending on both federal and local tax laws.

In general, federal income taxes are based on a predetermined percentage of an entity’s overall net income from operations or investments. Each state also has different rules in regard to this form of taxation, which could be higher or lower than those governing at the federal level. For instance, some states levy corporate income taxes while others may only impose sales tax on retailers.

Income taxes provide governments around the world with funds in order to pay for necessary services such as roads and law enforcement. Income tax also serves to redistribute wealth between different income brackets, ensuring everyone contributes their fair share.

One primary benefit of income taxes is that they encourage citizens to contribute back their fair share of earnings to benefit the country in which they live. By requiring individuals to pay taxes based on the amount of money they make, the government is able to fund vital public services like infrastructure, education systems, national defense, health care, and more. without this form of taxation, it would be challenging (or impossible) for governments to raise enough money via voluntary donations alone.

Income tax further helps bolster economic equality by taxing higher earners at a higher rate than those that make less money. This allows lower-income earners to keep more of their hard-earned wages while still contributing something back into the system that ultimately benefits everyone. Having a diversified tax structure can also prevent an unequal concentration of wealth from developing within society.

Journal Entry for Income Tax Expenses

At the end of the year, the company needs to calculate the annual income tax expense. It depends on the taxable income of the company, and it can vary from one country to another based on the tax law.

After getting the taxable income, we need to apply the tax rate which also differs from one country to another as well.

As the result, we will arrive at the income tax expense that needs to report on the income statement.

The journal entry is debiting income tax expense and crediting income tax payable.

Account	Debit	Credit
Income tax expense	XXX
Income tax payable		XXX

The income tax expense will be present on the income statement. We record the income tax payable as the payment date is not the same as the reporting date. It is the liabilities that the company has to the government.

Example

Company ABC is preparing the annual financial statement. The accountant has calculated the annual income tax expense which is equal to $ 23,000. The income tax amount will be paid to the government within 2 months after the reporting date. Please prepare journal entry for income tax expenses.

It is the current year’s income tax expense, so it must be included in the current income statement. At the same time, company has to record the liability to the government as the tax is not yet paid.

The journal entry is debiting income tax expense $ 23,000 and crediting income tax payable $ 23,000.

Account	Debit	Credit
Income tax expense	23,000
Income tax payable		23,000