How to Record and Account for Income Tax

Create an Income Tax Account

1. From the Chart of Accounts under Accounting
2. Select Liabilities, then click Current Liabilities.
3. Create a new account named Income Tax.

Close the Financial Period

1. At year-end, close all revenue and expense balances in the income statement.
2. Transfer the net result (profit or loss) to Retained Earnings in Equity.

• For more details, see the guide of closing the fiscal year.

Record the Accrued Income Tax

• After calculating the income tax due, create this journal entry:

  • Debit: Retained Earnings

  • Credit: Income Tax

This reflects that tax is deducted from retained earnings and recognized as a liability.

Record the Tax Payment

• When the tax is actually paid to the Tax Authority, record this entry:

  • Debit: Income Tax

  • Credit: Bank (or Cash)

.This clears the liability and shows the payment from your bank