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    Income Taxes Payable

    Income taxes are an accrued expense that is based on the amount of the company's net income. As income tax expense accrues, a corresponding liability is credited, meaning that the expense will eventually become payable. There is some dispute about whether income taxes payable are an estimated liability because uncertainty exists where the amount owed is subject to restatement by the Internal Revenue Service. 

    If a small corporation has a profit of $100,000 at the end of the year and is taxed at 35%, its tax liability at the end of the year would be $35,000 (assuming it made no installment payments during the year). 

    Most corporations are required to make income tax payments in installments throughout the year, usually estimated based on the income tax payable for the previous year. Last year the company had to pay $35,000 in income tax. Using this number to estimate this years quarterly installments, the company would have to pay $8,750 each quarter. Each installment payment reduces the company's income taxes payable account. 

    An alternative approach is to charge each installment payment to income tax expense, and then adjust the expense account at the end of the year when the actual income tax expense becomes known. Both approaches will lead to the same amount of expense, liability and payment amounts being recognized in the year.

    In the future, if the Internal Revenue Agency reassesses an additional tax on an earlier years' income, the expense is charged to the current period's operations. At the same time, either the income taxes payable account will be increased or the cash account will be credited (if the expense is paid right away). 

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