At the end of an accounting period one of the adjusting entries is to accrue for estimated income tax payable due on the profits of the business.
Suppose a business has an estimated annual income tax expense of 14,000. As the income tax is estimated, a demand for the amount has not yet been received and the expense has not been recorded in the accounting records.
Accrued Income Tax Journal Entry
At the end of the accounting period the business needs to accrue the estimated income tax expense due, the accrued income tax payable journal entry is as follows:
|Income tax expense||14,000|
|Income tax payable||14,000|
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the owners equity of the business. This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.
|None||=||Income tax payable||+||Income tax expense|
In this case the balance sheet liabilities (income tax payable) has been increased by 14,000, and the income statement has an income tax expense of 14,000. The expense reduces the net income, retained earnings, and therefore owners equity in the business.
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