To know the difference between tax expense and taxes payable is important because both are mentioned in financial statement. Tax expenses are calculated on our calculation of net income. Tax payable is calculated on the basis of rules of Income tax law 1961.
When we calculate our net income through making of income statement, it is necessary to show the adjustment of income tax expenses if your organisation is company type. In company, just calculate the income tax expenses by multiplying the rate of income tax with our net income.
Now, on this basis, we submit our income tax return and payment of tax. Now, income tax department checks our income statement. If we are showing some expenses which are not accepted, these expenses will be deleted from income statement. Now, correct net income is calculated as per income tax law. On this basis, income tax is calculated. If our paid income tax is less than actual income as per income tax law, we will have the liability of income tax and this liability will be called tax payable. We will show it in the liability side of our balance sheet.
There are lots of differences net income as per accounting rules and as per income tax law. One of the main reason is the difference in the calculation of depreciation on different fixed assets. Rates and methods of calculation of depreciation may be different on this basis our income tax expense and tax payable will become different.
For example our net income as per accounting rules are Rs. 70,00,000 and depreciation as per our calculation is Rs. 10,00,000. So, our income tax expense is Rs. 70,00,000 X 35% (company income tax rate) = Rs. 2450,00,000. So, we have paid Rs. 24,50,000
As per income tax rules, our depreciation is only Rs. 5,00,000. So, our net income will increase with Rs. 5,00,000, it will become Rs. 75,00,000. So, actual income tax as per law will be Rs. 2625000. Now, still we have to pay Rs. 175000, it will be our income tax payable.
When we calculate our net income through making of income statement, it is necessary to show the adjustment of income tax expenses if your organisation is company type. In company, just calculate the income tax expenses by multiplying the rate of income tax with our net income.
Now, on this basis, we submit our income tax return and payment of tax. Now, income tax department checks our income statement. If we are showing some expenses which are not accepted, these expenses will be deleted from income statement. Now, correct net income is calculated as per income tax law. On this basis, income tax is calculated. If our paid income tax is less than actual income as per income tax law, we will have the liability of income tax and this liability will be called tax payable. We will show it in the liability side of our balance sheet.
There are lots of differences net income as per accounting rules and as per income tax law. One of the main reason is the difference in the calculation of depreciation on different fixed assets. Rates and methods of calculation of depreciation may be different on this basis our income tax expense and tax payable will become different.
For example our net income as per accounting rules are Rs. 70,00,000 and depreciation as per our calculation is Rs. 10,00,000. So, our income tax expense is Rs. 70,00,000 X 35% (company income tax rate) = Rs. 2450,00,000. So, we have paid Rs. 24,50,000
As per income tax rules, our depreciation is only Rs. 5,00,000. So, our net income will increase with Rs. 5,00,000, it will become Rs. 75,00,000. So, actual income tax as per law will be Rs. 2625000. Now, still we have to pay Rs. 175000, it will be our income tax payable.
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