Income Tax Amount..
Q: In form 1120 the federal income tax is based on the net income. that federal income tax amount, should it be an expense or should it be charged to retained earnings?
A: -In the books of a company when they close the books for the year, one of the entries they make will be a debit to Retained Earnings and a credit to Income Taxes Payable for the Federal and State taxes that apply to that closed out year. These amounts will, of course, be paid in the next year as you mention. This discussion assumes that the company is using the accrual method of accounting as opposed to the cash method. -The income tax expense for the year should be recognized on the books for that year. You don't just make direct entries to retained earnings to record expense items that should have been recorded in the prior year. The difference between your estimated tax expense and your actual tax expense should be booked through the income statement in the following year. Technically, you should book income tax expense on the estimated taxble income plus or minus any temporary book/tax differences. You should book taxes payable on the estimated taxes based on taxable income. The difference, which is the tax effect of your temporary differences, should be debited or credited to deferred income taxes. See SFAS 109, Accounting For Income Taxes.