What Is The Accounting Entries?

Tax accounting entries refer to the series of steps that accountants take to estimate, record, and file taxes accurately and efficiently. Recording tax entries is a fundamental part of this process, as it documents all amounts due to be paid to the state, which represents the interest of the responsible government authority in your country. The tax entry helps clarify the company’s tax obligations, including the deadlines set for payment. This includes all outgoing invoices, assets, and any other business transactions. In other words, it includes everything recorded in the income statement or any other revenue.

How Do Accountants Organize and Analyze Financial Data for Tax Estimation?

Have you ever wondered how accountants organize and analyze financial data to accurately estimate taxes? Do you want to learn more about the processes and challenges accountants face in tax processing? Accounting entries for taxes are among the most important operations in the accounting field, playing a crucial role in achieving financial transparency and complying with tax laws. According to the International Federation of Accountants (IFAC), companies spend up to 24% of their time processing taxes. With the continuous evolution of tax laws and information technology, understanding the accounting treatment of taxes has become increasingly important for both individuals and companies. In this article, we will explore the details of tax accounting entry processes with practical examples.

Key Points

• Tax entries are accounting records that document all financial values that a company must pay to the government for the benefit of the relevant tax authority.
• Usually, there is a specific tax rate for each financial transaction, and this data is clearly recorded for both the debit and credit sides.
• Corporate income tax entries cover the tax imposed on income. There are two methods for processing corporate income tax entries: the indirect method or the direct method.
• Adjustment entries are considered part of routine accounting operations in case of a discrepancy between the estimated tax value by the accountant and the adjusted value by the tax authorities.
• In case of a difference in the total value-added tax (VAT) for sales and purchases, the accountant needs to make an adjustment entry to achieve financial matching based on the offsetting principle.
• Recording tax accounting entries ensures full compliance with tax legislation, protecting individuals and companies from financial fines and penalties. It also helps in accurately determining due taxes, which reduces calculation errors and increases tax compliance opportunities.
• The total sales amount and the due sales tax are recorded in the accounts ledger. These taxes are collected from customers and recorded in the treasury, including the details of the tax and the net sales amount.
• The VAT payment entry is used to record cash payments, checks, or bank transfers that are paid to the tax authorities as value-added tax.
• Recording tax entries reduces financial risks related to taxes and helps improve the financial stability of individuals and companies. It also enhances the level of financial transparency, making it easier for individuals and companies to attract investments and business partners.

The Importance of Recording Tax Entries

Recording tax accounting entries provides a strong and reliable basis for making important financial decisions. When tax data is accurate and reliable, it is easier for individuals and companies to identify financial trends and plan for future growth. Here are the most important key points about the importance of recording tax entries:

• Legal Compliance: Recording tax accounting entries helps ensure full compliance with the tax legislation in force in the country or the relevant entity. Consequently, financial fines and penalties that could be imposed on individuals and companies for non-compliance with tax laws can be avoided, which protects the financial and legal interests of both individuals and companies.
• Accurate Determination of Due Taxes: Through recording tax accounting entries, accountants can accurately determine the due taxes. This is done by analyzing financial data and estimating revenues and expenses correctly, in addition to applying the applicable tax legislation. This allows individuals and companies to submit accurate and reliable tax returns, which reduces calculation errors, increases tax compliance opportunities, and reduces the likelihood of audit summons from tax authorities.
• Mitigating Financial Risks: Accurately recording tax accounting entries reduces the financial risks associated with taxes. Companies and individuals can plan their budgets more effectively and accurately, avoiding financial problems that may arise from not anticipating tax obligations correctly. This also contributes to improving financial stability and enhancing the chances of business success.
• Improving Financial Transparency: Accurate documentation contributes to improving the level of financial transparency, as it provides accurate and reliable information to shareholders, partners, and other external parties. When these parties have access to accurate accounting information about taxes, they can make better and more confident financial and investment decisions. Additionally, improving financial transparency enhances trust in the individual or company, which contributes to strengthening relationships with business partners, customers, and investors. Consequently, individuals and companies can take advantage of new opportunities for growth and expansion based on their positive reputation.
• Saving Time and Effort: Organizing tax accounting entry processes helps save the time and effort required to prepare tax returns and deal with tax authorities more efficiently. When tax entries are documented and financial data is managed systematically and organized, it becomes easier and faster to prepare and submit tax returns at the appropriate time. Organizing accounting processes also reduces the need for additional procedures to verify the accuracy of tax data and information, which saves the time needed to correct errors and prepare returns correctly. In addition, organization contributes to reducing the human effort required to manage tax operations, as some operations can be automated and technology tools can be used to simplify and speed up the processes. In this way, individuals and companies can use the saved time and effort to develop their business and achieve their financial goals instead of spending it on complex and costly tax procedures.

Corporate Income Tax Entries

Income taxes represent a significant expense for most companies, requiring accurate accounting management and recording to ensure compliance with tax laws and the correct submission of tax returns. The income tax account includes recording tax expenses and liabilities based on the taxable income of the company. Two main accounts are used in income tax accounting that contribute to organizing the accounting and determining the due taxes:

1. Income Tax Expense: This account is for recording income tax expenses in the income statement. It represents the tax costs incurred by the company based on its taxable income.
2. Income Tax Payable: This account is credited when recording income tax expense. It represents the taxes payable to the government and contributes to determining the company’s tax obligations and submitting tax reports accurately and on time.

The recording of income tax in the company’s books is done through several accounting entries that include:

Income Tax Proof Entry

This entry is recorded to register the income tax payable on the company’s income in the main ledger. This amount is deducted from the net income to determine the net income subject to tax. There are two main methods for executing the accounting entries for taxes imposed on corporate income: the indirect method and the direct method, which are applied as follows:

• The Indirect Method: The company relies on the paid tax information available in public financial statements, such as the income statement and the public balance sheet. It records the taxes due based on the taxable income, which is calculated according to the applicable tax legislation. The indirect method also involves using specific tax rates to calculate the taxes due, which may differ from the actual rates applied to the company’s income. The indirect income proof entry is applied as follows:

Debit	Credit	Description
xxx		From A/C Income Tax Expense
	xxx	To A/C Income Tax Payable

• The Direct Method: The taxes due are estimated directly based on the tax laws and rates applicable to the company’s income. The taxes due are recorded based on the actual revenues, expenses, and deductible tax liabilities, among other specific accounting details. The direct method also requires precise knowledge of the applicable tax legislation and the provision of detailed accounting information to calculate taxes accurately. The direct income proof entry is applied as follows:

Debit	Credit	Description
xxx		From A/C Profits and Losses (Income Summary)
	xxx	To A/C Income Tax Payable

Corporate Income Tax Calculation Adjustment Entries

This entry is recorded to adjust the income tax account at the end of each accounting period. The entry is adjusted based on any differences between the tax payable and the tax paid, which may be the result of using tax deductions or other tax improvements. When the two sides are not equal, it is settled for less than the due amount or more than the due amount and is applied as follows:

• Settlement is made for less than the due amount: When the estimated income tax value is less than the due amount, a negative difference arises. This negative difference is recorded in the retained earnings account as an increase in the tax payable. The income adjustment entry is applied as follows:

Debit	Credit
xxxx	xxxx To A/C Income Tax Payable

• Settlement is made for more than the due amount: When the estimated income tax value is higher than the due amount, a positive difference arises. This positive difference is recorded in the retained earnings account as a decrease in the tax payable. The income adjustment entry is applied as follows:

Debit	Credit
xxxx From A/C Income Tax Payable	xxxx

Corporate Income Tax Payment Entry

This entry is recorded when paying the tax due to the tax authorities. The paid amount is deducted from the company’s cash account, and the paid item is recorded in the expense or liability accounts, depending on the approved accounting method, and is applied as follows:

Debit	Credit
xxxx From A/C Income Tax Expense	xxxx

Example A contracting company has completed a construction project, and the accounting profit margin was 1,000,000 EGP, while the tax profit margin was 2,500,000 EGP. How are the income entries recorded, knowing that the comprehensive income tax is 22.5%?

• Corporate income tax = 2,500,000 * 22.5% = 562,500
• Income Proof Entry

Debit (EGP)	Credit (EGP)	Description
562,500		From A/C Income Tax Expense
	562,500	To A/C Income Tax Payable

• Closing Entry for Tax Expense in the Profit and Loss Account

Debit	Credit
562,500 From A/C Profits and Losses (Income Summary)
	562,500 To A/C Income Tax Expense

Due Sales Tax Entries

Due sales tax entries represent the recording of accounting operations related to sales that include sales tax. These taxes are collected from the customer by increasing the price of the product. The customer pays the value of the commodity in addition to the sales tax to maintain your company’s profit margin. Consequently, the total amount is collected from the customer, including the tax, and is recorded in the treasury. These entries are recorded as follows:

1. At the beginning of the process, the total amount due is recorded when selling products or services, including sales tax.
2. The total sales amount is recorded in the sales account, with the sales tax identified as a separate item.
3. The due sales tax amount is recorded as a debit in the sales tax account. This amount is considered a payable to the tax authorities.
4. The due sales tax amount is deducted from the total amount due upon the sale of products or services to determine the net sales.
5. At the end of the accounting period, the sales tax account is settled based on the amounts due and paid, and any difference between them is recorded as a debit or credit amount depending on the case.
6. Cash payments for sales tax are recorded when they are paid to the tax authorities, and these payments are recorded as a deduction from the sales tax account.

The recording of due sales in the company’s books is done through several accounting entries that include:

Sales Tax Proof Entry

The sales tax proof entry is used to record the amount required from the company as sales tax based on the sales that have been made. This entry is recorded as a credit in the sales tax account to reflect the amount that must be paid to the tax authorities. This amount is determined based on the applicable sales tax rate, and the accounting records are updated according to the correct tax information, and it is applied as follows:

Debit	Credit
xxxx
	xxxx To A/C Due Sales
	xxxx To A/C Due Sales Tax

Sales Tax Payment Entry

The sales tax payment entry is used to record cash payments, checks, or bank transfers that are paid to the tax authorities as sales tax. This entry is recorded as a debit in the due sales tax account to reflect the amount paid. The paid amount is determined based on the tax invoices or tax adjustments related to the sales tax.

Debit	Credit
xxxx From A/C Due Sales Tax	xxxx

Example The sales invoices of a home appliance company during the month of 1/2019 amounted to $11,000 before tax, and the purchase invoices during the same period amounted to $9,000 before tax. On 10/02/2019, the company paid the amount of tax due for the month of 1/2019 to the authority. If you know that the sales tax rate on the sale of goods is 10%, how are the sales entries recorded?

• Value of due sales tax = Value of sales before tax x tax rate
• 11000 * 10% = 1100
• The value of the amounts collected in cash from sales is 11000 + 1100 = $12100

Debit	Credit
12100
	1100 To A/C Due Sales
	11000 To A/C Due Sales Tax

• Value of paying the due tax

The balance of the due sales tax account is (1100 – 900 = $200). When this amount is paid to the tax authority, the following entry is recorded:

Debit	Credit
200 From A/C Due Sales Tax	200

Value Added Tax (VAT) Entries

Value Added Tax (VAT) is a tax imposed on goods and services at their various stages of circulation. For example, when a commodity is manufactured, VAT is imposed on it. Then, it is imposed again when it is sold to the wholesaler, and a third time when the wholesaler sells to the retailer, and so on until the commodity reaches the final user. It may seem that the commodity is subject to tax more than once during these operations, but in reality, the commodity is subject to tax only once at each stage of circulation. In other words, the sum of the value-added tax at all stages of the commodity’s circulation is equal to the final price for sale to the final user, plus the value-added tax. These entries include the following operations:

• Sales Tax Entry: The total sales amount is recorded, including the due value-added tax, in the accounts ledger. This entry is recorded as a debit in the sales account and the value-added tax.
• Purchases Tax Entry: The total purchases amount is recorded, including the due value-added tax, in the accounts ledger. This entry is recorded as a credit in the purchases account and the value-added tax.
• VAT Adjustment Entry: This is used to record the VAT adjustment amount based on business transactions. This entry is also recorded as a credit in the VAT account.
• VAT Payment Entry: This is used to record cash payments, checks, or bank transfers that are paid to the tax authorities as value-added tax. This entry is also recorded as a debit in the VAT account.

The recording of value-added tax in the company’s books is done through the previous entries, which are applied as follows:

Sales Tax Entry

Debit	Credit	Description
xxxx
	xxxx	A/C Collected VAT on Sales

Purchases Tax Entry

Debit	Credit	Description
xxxx		A/C Paid VAT on Purchases
	xxxx

VAT Adjustment Entry

The adjustment entry is recorded to clear the differences between the tax due and the tax paid. If the tax paid is greater than the tax due, the difference is recorded as a debit to correct the balance. If the tax due is greater than the tax paid, the difference is recorded as a credit to correct the balance.

• If the tax paid is greater than the tax due

Debit	Credit	Description
xxxx		From A/C Collected VAT on Sales
		A/C Paid VAT on Purchases
	xxxx	A/C VAT under settlement

• If the tax due is greater than the tax paid

Debit	Credit	Description
xxxx		From A/C Collected VAT on Purchases
		A/C Paid VAT on Sales
	xxxx	A/C VAT under settlement

VAT Payment Entry

Debit	Credit
xxx	xxx

Example At the end of the year, the owner of a shoe company decided to clear the value-added taxes, and the following appeared:

• Total received sales: 900,000
• Supplies with a value of: 600,000
• Value Added Tax: 15%

Start by recording the value-added tax entries on due sales and supplies.

• Tax value = 900,000 * 15% = 135,000 SAR

Debit (EGP)	Credit (EGP)	Description
1,035,000
	900,000
	135,000	A/C Collected VAT on Sales

• Value of value-added tax in the case of purchases from the supplier
• Tax value = 600,000 * 15% = 90,000 SAR

Debit (EGP)	Credit (EGP)	Description
600,000
90,000		A/C Paid VAT on Purchases
	690,000

The adjustment entry that must be paid

Debit (EGP)	Credit (EGP)	Description
135,000		From A/C Collected VAT on Sales
	90,000	A/C Paid VAT on Purchases
	45,000	A/C VAT under settlement

So the value-added tax under settlement that is required to be paid becomes = 45,000 SAR.

Example of Calculating Tax Entries

A furniture company received supplies worth 1,000,000 EGP with zero deferred value, and the total due and received sales were 1,500,000 EGP. After calculating all revenues and expenses, the tax profit was determined to be 800,000 EGP, knowing that the tax rates imposed according to Egyptian law are as follows:

• Value Added Tax: 14%
• 22.5% for the tax imposed on net income.

Corporate Income Tax Entry

Income tax is applied to the tax profit, which in this case is equal to 800,000.

• 180,000 = 800,000 * 22.5%

Debit	Credit
180,000 From A/C Profits and Losses (Income Summary)
	180,000 To A/C Income Tax Expense

Value Added Tax Entries

• Value Added Tax entries on due sales
• Tax value = 1,500,000 * 14% = 210,000 EGP

Debit (EGP)	Credit (EGP)	Description
1,710,000
	1,500,000
	210,000	A/C Collected VAT on Sales

• Value of value-added tax in the case of purchases from the supplier
• Tax value = 1,000,000 * 14% = 140,000

Debit (EGP)	Credit (EGP)	Description
1,000,000
140,000		A/C Paid VAT on Purchases
	1,140,000

• The adjustment entry that must be paid

Debit (EGP)	Credit (EGP)	Description
210,000		From A/C Collected VAT on Sales
	140,000	A/C Paid VAT on Purchases
	70,000	A/C VAT under settlement

So the value-added tax under settlement that is required to be paid becomes = 70,000 EGP.

Frequently Asked Questions

• What are the value-added tax entries in Saudi Arabia? The value-added tax rate in Saudi Arabia is 15%.
• What are tax provision entries? Tax provision entries are entries that are recorded based on expectations to cover expected losses or costs.
• What are the withholding and addition tax entries? The withholding and addition tax entries range between 1% and 5%.
• What are some examples of adjustment entries? Examples of adjustment entries include: accrued salaries that have not been paid by the end of the month, accounting services provided for which an invoice has not yet been issued, rent paid in advance for 3 months, and other examples that express adjustment entries.
• What is the commercial and industrial profits tax entry? The commercial and industrial profits tax entry varies depending on the type of item on which the tax is imposed. For example, raw materials are taxed at 0.5%, and maintenance at 2%.
• What is the value-added tax accrual entry? The value-added tax accrual entry is the recording of the tax value upon the occurrence of the sale or purchase process to prove the value due according to the accrual principle.
• What is the value-added tax payment entry? From A/C (Due Value Added Tax) …………………… To A/C Bank

Conclusion

In conclusion of this article, we realize the importance of accounting entries and treatments for taxes in maintaining the integrity of financial systems and ensuring compliance with applicable tax legislation through the accurate and efficient estimation and recording of taxes. Individuals and companies can avoid financial penalties and ensure their financial stability. Tax management also requires a precise understanding of the applicable tax systems and local and international laws, in addition to using advanced accounting techniques and best practices in estimation and recording. By employing these tools, organizations can achieve tax compliance and improve money management. In the end, individuals and companies must be aware of the importance of accounting entries and treatments for taxes and work to improve their internal tax systems and operations to ensure full compliance and achieve financial stability and practical success.