By: Floyd C. Paguio
We had been browsing some search terms leading to our pages, blog posts and articles when we noticed the search phrase “accounting for withholding tax entries“, and this invites our attention to make a simple article on the accounting entries related to withholding taxes. To start with, please note that under the tax rules,
“obligation to withhold arise upon your payment, accrual, or recording in the books of an expense subject to withholding taxes, whichever comes earlier”
As such, we show you the sample related accounting entries in the books of the payor-withholding agent and that of the payee. To illustrate:
Let us assume that Company A secured the professional services of Mr. Juan de la Cruz amounting to P100,000, exclusive of 12% VAT, or a total of P112,000.00. What are the related accounting entries, assuming Mr. Juan de la Cruz’ income does not exceed P720,000.00 and the withholding tax rate is 10%?
I. Payment of expense subject to withholding
Upon payment, you may take the sample journal entry on the books of Company A as payor:
As payee, it is at this point that you will recognize the expense and decrease cash by the amount paid, net of withholding tax. Withholding tax is bound to be remitted within the next month, so you record it as a liability in the meantime. You please note also that withholding tax is based on amount excluding VAT so computation is 10% of P100,000.00 or P10,000.00.
Upon remittance of Company A to BIR using BIR Form No. 1601E with Monthly Alphalist of Payee, the sample entry would be:
On the books of payee Mr. A, you may take the sample journal entry below:
If Company A did not pay at the end of the period, and simply recognize the expense, you may take the sample entry as follows :
You could not use deferred creditable withholding tax against quarterly or annual income tax liability of Mr. A without the BIR Form No. 2307 from Company A, and you cannot make Mr. A liable for VAT on the deferred output VAT because as service provider, his tax liability is based on gross receipts or collections.
III. Payment of accrued expense subject to withholding
Upon payment of accrued expenses subject to withholding taxes, you may adopt the sample entries on the books of Company A:
You may likewise adopt the following sample entry upon collection of Mr. A of the recorded accrued revenue:
You please note that the deferred accounts are simply reversed to neutralize their temporary effect on the books.
The above are sample illustrative entries only, and you are free to make enhancements. Account titles may vary depending on the chart of accounts adopted by your company.
(Mr. Floyd C. Paguio is a Resource Speaker with Tax and Accounting Center, Inc. He is a Certified Public Accountant and the Managing Partner of GPP & Co., CPAs, an accounting firm engaged in the practice of accountancy catering clients from various industries. He is a professor of accounting at Polytechnic University of the Philippines – Taguig Campus and at the MAPUA I.T. Yuchechengco School of Business and Management. For comments, you may please send mail at email@example.com)
Disclaimer: This article is for general conceptual guidance only and is neither an expert opinion, nor a substitute for an expert opinion in itself. Please consult your preferred accountant or accounting consultant for the specific details applicable to your circumstances.
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December 14, 2017 Thursday – Input VAT Refund Seminar