Income taxes payable are income taxes (based on taxable income) that the company has not paid to the government. Because it represents an obligation that the company must pay in the next 12 months, the company reports it in the current liabilities section of the balance sheet.
For example, a company posted a pre-tax profit of Rp1,000, and the government imposed an income tax rate of 10%.
In the year-end financial statements, the company will record income taxes payable of Rp100 in the current liabilities. At the same time, it recognizes the income tax expense with an equivalent nominal in the income statement. The accounting equation remains balanced since an increase in liabilities and a decrease in shareholder equity are at an equivalent nominal of Rp100.
Next year, the company’s cash will decrease by Rp100 to pay taxes. And, the company eliminates income tax payable accounts from current liabilities.
