How to Prepare Journal Entries to Record Income Taxes

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A company must pay taxes on the income reported on its income statement. Accountants are responsible for computing this figure and entering the liability into the general ledger. The calculation for income taxes is not difficult. The most difficult part comes in the various other business taxes for transactions a company incurs during normal business operations. Accountants typically know the company’s income tax rates based on current tax laws. Historically, corporate income tax rates fall between 35 and 40 percent, which are the classic percentages used to train accountants on this activity.

Retrieve the most current income statement. Ensure the statement is the final one for the accounting period.

Multiply the company’s tax liability rate against the reported net income. This is the company’s tax liability.

Debit income tax expense and credit income tax payable to record this liability. An entry in the subsequent month is usually acceptable.

Tips & Warnings

  • A second part of this entry may reduce deferred income taxes payable. If a company has deferred income taxes payable, a second debit is necessary to remove this item from the books. The credit then increases to offset this debit in the journal entry.

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References

  • "Intermediate Accounting"; David Spiceland, et al.; 2007
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