A QuickBooks Online tutorial by Ronika Khanna (CPA, CFA) showing how Canadian corporations should record corporate income tax: set up three accounts (Income Tax Expense, Income Tax Payable (current liability), Interest & Penalties), enter a year-end journal entry recording tax expense and payable, and then record payments or installments by allocating bank transactions to the payable (with splits for any interest/penalties). The video demonstrates checking the Balance Sheet and Profit & Loss, handling overpayments (apply to next year or record a refund), and briefly notes deferred tax complexity is outside scope.
Chapters
Today we are going to look at how to enter your income taxes. If you are a corporation in Canada and this is fairly straightforward, what happens is you file your corporate taxes once a year and either your accountant is going to do that or if you are very enterprising, you might do it yourself. And you'll be told how much you are going to owe in income taxes. And this must be reflected in your financial statements. It is both a payable and an expense. So in this tutorial I am going to show you how to create the necessary accounts. In the chart of accounts. I'll then show you the journal entry to enter your income taxes. We'll also look at how to make payments towards those income taxes and also how to allocate your installment payments. And finally I'll show you how to record interest and penalties if you have paid your income taxes late. And we'll also look at the impact on the balance sheet and the profit and loss report. My name is Rodhika Canna. I am a C cpa, a CFA and the founder of Montreal Financial where you can find lots of resources for small businesses and you can sign up to my newsletter. Okay, so first of all let us take a look at the chart of accounts. And to go to the chart of accounts you can simply click here or you can go on the left hand side aside to the chart of accounts. And we are going to create three new accounts. And so the first account that we are going to create is going to be called Income tax expense. The account type is going to be now in QuickBooks Online. If you go simply to expenses you'll find that there is something for taxes paid. I don't like to use expenses, I like to use other expense because this means it shows at the bottom of my report where generally speaking on financial statements you will see the income tax expense. So I'm going to choose other expense and then here I can simply choose other miscellaneous expenses. The default tax code is exempt. There is no additional sales taxes on income tax expense. So you can simply choose exempt. And then I am going to click on save and new.
The next account that I want to create is an income tax payable account and this is a current liability. So from the account type drop down we are going to choose other current liability. And from the detail type you are going to scroll down and choose current tax liability. The default tax code for this is really, it's out of scope. You can choose exempt. There is not going to be any sales tax payable on top of this. So you want to reflect that in the default tax tax code. And then we are going to create one more account and we're going to call this interest and penalties. And if you don't owe any interest and penalties then you won't use this. But it's good to have because often when you submit your tax return and you have a balance owing, even though the corporate tax return is due six months after the year end, the CRA starts charging interest after three months and Revenue Quebec starts charging interest after two months. So for interest and penalties this is simply an expense. We are going to select that and then we are going to scroll down to interest paid. This is also exempt. Again, no sales taxes apply and we are going to reflect that and that's it. Now let's assume that on the T2 you have income taxes payable of $4,000 and you can see this on the T2 return, the main return or if you have an accountant they will likely just give you the the journal entry. And just a quick note, there is a concept referred to as deferred income taxes which is required under generally accepted accounting principles. But if you are a small business, a one person corporation, that is a more complex area of tax. So it is fine to simply record the actual amount of tax payable during the year rather than this deferred tax which relates to differences that might crop up due to the tax treatment of certain items, most notably depreciation. I'm not going to get into that more. That is the subject for another tutorial. Okay, so let's look at the journal entry. We are going to click on + new and under other select journal entry. The date of the journal entry is going to be your year end. So in this case the year end for the Sherlock Holmes detective agency is November 30th. So I'm going to select November 30th and I am going to choose income tax expense $4,000. And then here I'm going to.
Put in a description of to record income tax expense for the year. The name could be Revenue Canada.
And I don't appear to have a Revenue Canada so I'm going to simply add it here. Add new.
They're actually a supplier because you usually owe money to them. There's no sales tax. You don't have to enter anything else here. And then income tax.
Payable is here. And similarly I can put in Revenue Canada as the name. The description just copies from above. So that's really it for the actual journal entry that you have to enter. So we're going to save and close this.
And now let's go to the reports. You can see what it looks like.
So I have some custom reports here. We're just going to go to standard reports. Click on balance sheet. And here I want to choose the last fiscal year click on run report. And if I scroll down here, you'll see that I have income tax payable of $4,000. And similarly if we go to the profit and loss report and I go to the last fiscal year run report and you go all the way down, you'll see now that income tax expense is right at the bottom and this is where it should be. Okay, so now the next thing we're going to look at is how to allocate a payment. So I'm going to go to my bank transactions and here you'll see that I have some payments that I have made as installments during the year. But these can also simply just be a payment that you made once you received your tax bill. And you can make the payment once the tax return has been filed via online banking or you can wait for the notice of assessment. So let's click on this.
And from the category what we we have set up our income tax expense and our payable. So we are not going to select income tax expense again because it's already been set up. We are going to allocate it to the liability the amount that we have owing to Revenue Canada. And so I am going to simply choose income tax payable.
The payee is going to be Revenue Canada and the sales tax is going to be out of scope. You can set this as a default category. This will always apply. It should have shown up, but sometimes QuickBooks is a little glitchy. Now included in this, let's just say this is my final payment and I have $100 of this $6,000 payment. Let's say $100 is for interest and pay penalties. So to do that and to record this directly from here and to record it correctly, I simply will click on split and I have my income tax payable which is of the $6,000 over here, it's going to be 5,900. And then from the category you'll see I have a second line here and you can add lines if you have money more. And I'm going to put in $100. It's already exempt and I don't really need to enter this other information. It may not even show up for you. And so you'll just make sure that the total agrees to the original amount. The difference is zero and that's pretty much it. So I split and add this to my books. Now if I go to my reports, if I go to my balance sheet report, you'll recall our income tax entry was for $4,000, but we made a payment towards income tax payable of 5,900, which is a $6,000 less the $100 of interest. So if I go here and click on run report, you'll see I have a negative payable of $1,900. This means that Revenue Canada owes me $1,900. Now, generally speaking you have a choice. You can simply allocate this towards next year's taxes or you can request a a refund. If you allocate this towards next year's taxes, you simply leave this. It is a negative payable as mentioned and it shows that you have overpaid your taxes and this will be applied to next year's taxes when you make the journal entry. If you are going to get a refund that will likely be deposited in your bank account and you would simply choose choose the income tax payable account from the drop down from the bank transaction download. If you're not using bank transactions, you can simply go here. You can select bank deposit and put Income tax payable. We're going to choose Revenue Canada.
Income tax.
Payable $1,900. This is out of scope. I always like to choose purchases because it's not really a sale. And then we're going to choose save and close.
And you'll see that the amount is now is back to zero because you received a refund for that amount. So that is essentially how you would record your income tax expense and payable. If you have any questions, don't hesitate to leave a comment and I will try my best to answer it. And if you found this helpful, please like and subscribe. Have a great day.
