The Internal Revenue Service administers rules that businesses and individuals must follow. To avoid full-scale IRS audits or limited-scope inquiries, companies put sound policies into place to promptly pay taxes. Taxes payable, a liability account, is a balance sheet item, not an income statement component.
To understand why taxes payable are part of a corporate balance sheet, it’s useful to master the report’s components, as well as how accountants distinguish items based on maturity and operating life. A balance sheet is also referred to as a statement of financial position or statement of financial condition. Given the importance of the balance sheet, top leadership sets adequate policies to ensure mathematical accuracy, operating effectiveness and regulatory compliance for corporate resources and debts. The goal here is to make sure what’s efficient for production and profitability is in tune with reputation-management and legal conformity. Assets include equipment, computer software and hardware, land, cash and accounts receivable. Liabilities include accounts payable and bonds payable.
In modern economies, corporate management heeds the “3C concept” when plotting commercial strategies that will generate profits down the road. 3C stands for costs, customers and competitors. To increase revenues, a company establishes adequate tactics to curb operating costs, defines the markets it wants to serve and how the business intends to trump rivals. An income statement is also referred to as a statement of profit and loss, revenues-and-expenses report or P&L. Revenues include earnings from sales as well as billings derived from investment activities, such as acquisitions and sales of stocks and bonds.
Income Taxes Payable
To comply with accounting norms and industry standards, financial managers report income taxes payable as a short-term liability. This is because the firm must pay the debt within 12 months, lest it suffer the wrath of the IRS and state tax authorities. To calculate income taxes payable, corporate accountants multiply the firm’s operating income by its aggregate tax rate. This includes rates from the federal government as well as state, city and county revenue agencies.
A company’s income statement indicates annual revenues and expenses of $1 million and $900,000, respectively. The firm’s aggregate tax rate is 30 percent. The corporate accounting manager determines that operating income equals $100,000, or $1 million minus $900,000. The manager also calculates taxes due and finds $30,000, or $100,000 multiplied by 30 percent. Accordingly, the firm’s net income equals $70,000, or $100,000 minus $30,000. The financial manager reports a $30,000 taxes-payable amount in the “short-term debts” section of the balance sheet.