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Capital structure and finance costs

Income tax on the profits of a business

6.1 Income tax relating to sole traders and partnerships

Any income tax payable on the profit made by a sole trader or a
partnership is imposed on the individual, and not the business. If the
business bank account is used to pay a personal income tax liability of
a sole trader or of a partner in a partnership, it is a form of drawings and
the payment should be accounted for as follows:

Debit Drawings (or Partner current account)

Credit Cash

6.2 Income tax relating to limited liability companies
Any income tax payable on the profit made by a limited liability
company is a business expense and should be accounted for on an
accruals basis in the statement of profit or loss as follows:

Debit Income tax expense (in SP&L)

Credit Income tax liability (in SOFP – a current liability)

When the income tax liability is subsequently paid by the company, the
payment should be recorded as follows:

Debit Income tax liability

Credit Cash

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