The Difference Between Income Tax Expense & Income Tax Payable
If you own or manage a for-profit business, you undoubtedly know that every April 15 is the deadline for filing your income tax return with the Internal Revenue Service. In addition to federal income tax, most states also impose an income tax. As of March 2011, there are only nine U.S. states that do not impose an income tax on their citizens: Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming. Therefore, if your business is not located in one of those states, you need to understand how to deal with both federal and state income taxes.
Two common financial statements used by most businesses are the income statement and the balance sheet. The income statement records the revenues and expenses of the business and shows the net income or loss for the reporting period. The balance sheet shows the business's assets, liabilities and owners' or stockholders' equity as of a certain date.
Every time an accounting entry is made, the total debits must equal the total credits. Asset and expense accounts are increased with debits and decreased with credits. Liability, equity and revenue accounts are increased with credits and decreased with debits. Therefore, if, for example, you debit an expense account to reflect that you incurred a cost, you must also credit an account. If you paid the expense in cash, you should credit the cash account to reflect that your cash assets were reduced. If you have not yet paid for the expense, you should credit a liability account to show that the business has increased liabilities.
Income tax expense is an income statement account that you use to record federal and state income tax costs. The accrual method of accounting requires you to show expenses in the period that the expense is incurred, rather than in the period that the expense is paid. Therefore, although you may pay taxes annually or quarterly, you should do an adjusting entry during each period for which you produce an income statement. The entry to income tax expense will be a debit because you are increasing the expense account. Typically, income tax expense is shown right after the total of income before tax and just before net income or loss.
Income tax payable is a liability account that is shown on the balance sheet. You use it to record any income tax amount that you owe but have not yet paid to the appropriate taxing authority. When you do your adjusting entry each period and debit income tax expense, you will credit income tax payable. When you actually pay the income tax liability, you will debit income tax payable and credit cash. However, there are certain situations when net income reported according to generally accepted accounting principles does not equal taxable income as reported on your tax return. Generally, this is a temporary situation that evens out over time. Until then, you need to record those differences to an asset or liability account titled "Deferred Tax."