When we talk about expenses we usually think of using something. For instance we used electricity in our factory therefore we have electricity expense.
When we post income tax entries are :
Dt income tax expense
Cr income tax payable
Credit entry tells us about liability we owe. Debit entry tells us about expense incurred but what has been used ?
-- Edited by rafapak on Sunday 10th of January 2016 10:24:09 PM
As you know, a company PL looks like very similar to this
Turnover Cost of sales Gross Profit
Selling and distributioncosts Administration expenses Net profit before interest and taxation
Interest and similar charges Net profit before taxation
Taxation Profit after tax
With any outgoings to the business, I always feel it's best to think about the bit in bold, rather than the bit in blue. The bold is the bit that will help you to understand where a cost should go.
You'll already know that "cost of sales" (also referred to as "cost of goods sold") is money spent on stock, alterations to stock, services directly related to what is invoiced to the customer etc etc, which may also have had certain year end adjustments applied.
Selling and distribution costs, more or less, speak for themselves.
Admin expenses are like support costs.. they are not directly allocatable to sales, but provide the necessary means to work and provide the product/services, as well as, support the other functions of the business like the accounts department. Rent, rates, light and heat, etc etc..
The taxation expense is a separate category on its own, much like "interest and similar charges"... they are both still an expense to the business, but they are not quite the same as the other three that we have discussed above.. which is where you would probably think of something being used.
You may, or may not know, that interest payable, and receivable, has to be reviewed when preparing the corporation tax return - and dependant on the results of this review, it may be need to be disclosed in a certain way on the tax return - different to the three above but you could say its much like depreciation has to be added back and capital allowances used instead.
Taxation is then the cut that our lovely tax man wants, for our contribution to the GDP (I am not sure if that's the correct way of saying it, but I am sure you know what I mean! LOL! I am not into politics of any form). If you ask me, its probably the expense we hate the most! LOL! The taxation section can include the liability for the year, but it can also have adjustments for things, like, an under/over provision in the previous year, or changes in deferred tax. I wont bore you with those details unless you really want to know!
Hope this helps some :)
Edited because advanced editor removed the blue text and made it black
-- Edited by sausalito on Monday 11th of January 2016 06:56:25 PM
