Monday, April 20, 2009

#76 Classification of Tax Refund

Should tax refund be classified as Income in financial statement?

Let's look at the double entries of tax refund upon receipt of advice / monies from the Income Tax Authority of the country:

Dr. Cash
Cr. Taxation Expense

Let's illustrate with example. Company XYZ made provision for tax in relation to Year of Assessment 2008 amouned to US$200 based on its tax computation, full payment of US$200 has been made. US$200 has been charged to its income statement as taxation expense.

In the same year/ subsequent year, Comptroller of Income Tax inform the Company that there's a computation error, and the actual tax for YA 2008 should be US$180 (ie overpaid by S$20). The Company should have recorded a credit to its taxation expense account (i.e. a gain to income statement) as tax refund.

In short, tax refund should not be classified as income in financial statement. It should be considered a credit to taxation expense account.

No comments: