Loans & drawings · Level: Exam
Journal entry: Owner's income tax paid from the business
For a sole trader, income tax is the owner's own tax. Paying it from the business account is drawings.
Worked example
The owner's personal income tax payment of £1,500.00 is paid from the business bank account.
Correct journal entry
Drawings £1,500.00 / Bank £1,500.00
Debit
Drawings£1,500.00
Credit
Bank£1,500.00
Why?
- Drawings: drawings reduce capital → debit
- Bank: asset decreases → credit
Calculation
- Personal income tax is private, not a business expense.
Typical mistake
Booking the income tax as a business expense.
Your turn
Three problems on exactly this case, with different numbers. Amounts work with or without separators, e.g. 2,400.00 or 2400.
Transaction
The owner's personal income tax payment of £4,800.00 is paid from the business bank account.
Debit
Assets up · expenses · liabilities down
Total debit£0.00
Credit
Liabilities up · income · assets down
Total credit£0.00
Frequently asked questions
What is the journal entry for owner's income tax paid from the business?
Example: Drawings £1,500.00 / Bank £1,500.00.
How do I recognise this case?
For a sole trader, income tax is the owner's own tax. Paying it from the business account is drawings.
What is the typical mistake?
Booking the income tax as a business expense.