Explanation of Income Tax Liability Payment through Petty Cash

When a business owner or a sole proprietor pays income tax liability through petty cash, it is not an ideal way of making payments. This practice is not only illegal but also creates discrepancies in the accounting books. The income tax liability payment is a significant expense for any business, and it should be handled with utmost care to avoid any issues with the tax authorities.

Disadvantages of Paying Income Tax Liability through Petty Cash

1. Unrecorded Transaction: When the payment is made through petty cash, there is no record of the transaction in the accounting books. It creates accounting discrepancies and can lead to legal issues in the future.

2. Non-Compliance with Tax Laws: According to tax laws, payments exceeding a certain limit should be made through a bank or a cheque. Paying income tax liability through petty cash is a violation of the tax laws.

3. Inaccurate Financial Statements: Non-recording of the transaction in the accounting books can lead to inaccurate financial statements. It can affect the business’s creditworthiness and reputation in the market.

Correct Way to Pay Income Tax Liability

The correct way to pay income tax liability is through a bank or cheque. The payment should be recorded in the accounting books, and the payment receipt should be kept as proof of payment. This method ensures compliance with tax laws and accurate financial statements.

Conclusion

Paying income tax liability through petty cash is not advisable. It violates tax laws and creates discrepancies in accounting books. The correct way to pay income tax liability is through a bank or cheque, and the payment should be recorded in the accounting books. It ensures compliance with tax laws and accurate financial statements.