Understanding Adjusting Entries After Tax Settlement – ​​With Examples

Adjustment entries after tax settlement: Handling of VAT, CIT, PIT arrears; inventory and cash differences and accounting for late tax payment penalties…

I. Handling VAT, CIT, PIT after settlement

1. Adjusting VAT and CIT after tax settlement

After settlement, if the enterprise makes a mistake that increases the corporate income tax payable, or reduces the deductible VAT, leading to an increase in the VAT payable, then upon receiving the settlement result document, the enterprise shall account as follows:

➤ If the business was losing money last year (Debit Balance 4211):

Accounting for Debit account 811:

• Credit account 3334: Additional corporate income tax payable;
• Credit account 33311: Additional VAT payable. 

This expense will not be deducted when settling corporate income tax and will be recorded in item [B4] ”Non-deductible expenses when determining taxable income” of the corporate income tax return.

➤If the business was profitable last year (Credit Balance 4211):

For private enterprises and single-member LLCs:

Accounting for Debit account 4211:

• Credit account 3334: Corporate income tax arrears;
• Credit account 33311: Additional VAT payable after settlement.

For joint stock companies and LLCs with 2 or more members:

– There must be minutes of the meeting of the board of members. If the members agree to include it in the previous year’s profit, then account for it: 

• Debit account 4211;
• There are account 33311, account 3334.

– If members do not accept to include the previous year’s profit but leave the profit to be distributed as dividends, then handle:

• Debit account 811;
• There are account 33311, account 3334.

– In case the reduction in deductible VAT does not lead to an increase in VAT payable, the following shall be recorded:

• Debit account 4211;
• Credit account 1331: Deductible VAT amount is reduced.

– Cases that increase the deductible VAT amount:

• Debit account 33311: Deductible VAT amount increased;
• Credit account 4211: Profit increased due to cost reduction.

– Cases of reducing output VAT

• Debit account 33311: Reduced VAT amount;
• Credit account 4211: Undistributed profits of previous year.

2. Adjusting personal income tax after tax settlement

When additional personal income tax is collected, the enterprise determines whether this personal income tax will be paid by the employee or by the company.

➤If paid by the employee and deducted from this period’s salary, then account for:

• Debit account 334 – Deduct the amount collected from employee salary;
• Credit account 3335: Personal income tax arrears.

➤If the personal income tax to be collected is paid by the company, the accounting is similar to VAT and corporate income tax, specifically:

– If the enterprise has a Debit balance of 4211, then record: 

• Debit account 811;
• Have account 3335.

– If the enterprise has a Credit balance of 4211 (profit) and in a joint stock company or LLC with 2 or more members, the members agree to include it in the previous year’s profit, then account for it:

• Debit account 4211;
• Have account 3335.

3. Accounting for taxes paid to the state budget

When paying taxes to the state budget, you account for:

• Debit account 33311: VAT amount to be collected;
• Debit account 3334: Additional corporate income tax payable;
• Debit account 3335: Personal income tax arrears;
• Credit account 1111/112: Amount paid for VAT, corporate income tax, personal income tax.

When reducing the deductible VAT amount, in addition to accounting in the books, the enterprise must adjust the additional declaration of the deductible VAT reduction period and enter it into indicator 37 – “increased adjustment” of the current VAT declaration when there are inspection and examination results.

Example 1 : 

Company A is a 2-member LLC with an inspection report dated May 25, 2022 with the following tax collection results for 2020:

– Tax collection: 70,000,000 VND, including:

• VAT: 20,000,000 VND;
• Corporate income tax: 50,000,000 VND.

Company A had a loss after tax last year of VND 150,000,000 (Debit balance 4211). How to account for tax arrears and payments?

➨ Answer: 

On May 25, 2022, after receiving the inspection report from the tax authority, company A accounted as follows:

– Debit account 811: 70,000,000 VND;

– Credit account 33311: 20,000,000 VND;

– Account 3334: 50,000,000 VND.

When paying taxes to the state budget:

– Debit account 3334: 50,000,000 VND;

– Debit account 33311: 200,000,000 VND;

– Account 1111/1121: 70,000,000 VND.

II . Handling inventory and cash differences

1. In case of detecting excess goods, raw materials, finished products, tools or cash (Actual check number is larger than the book number)

In all cases of excess goods at any stage, the enterprise must make a record and find out the cause of the excess.

– If there is a mistake in weighing and measuring or a mistake or forgetting to record, the business must adjust the accounting books.

– If the cause has not been determined and is pending Board of Directors’ handling, account as follows:

• Debit account 156/155/152/153/1111;
• Credit account 3381 – Surplus assets awaiting disposal.

– When there is a decision of the Board of Directors on handling excess goods:

• Debit account 3381 – Surplus account awaiting decision;
• Credit account 331: If there is excess due to supplier’s delivery, decide to buy all the excess goods;
• Credit account 152/155/156/153: If there is excess due to the supplier delivering excess goods and deciding to return the excess goods to the supplier;
• Credit account 711: If the cause cannot be determined and the Board of Directors decides to include it in other income.

2. In case of detecting shortage of goods, raw materials, finished products, tools and equipment (Actual inspection number is smaller than the book number)

– Similar to the case of surplus, if the cause of shortage cannot be determined and the Board of Directors is waiting for it to be processed:

• Debit account 1381 – Asset shortage awaiting settlement;
• There are 156/152/155/153/1111.

– When there is a decision of the Management Board, accounting:

• Debt 1111 – If the person causing the error pays compensation in cash;
• Debit 334 – If deducted from the salary of the employee who committed the mistake;
• Debit 632 – The remaining loss value of goods, raw materials or tools is included in the cost price;
• Credit account 1381 – Asset shortage awaiting settlement.

III. Handling other cases after tax settlement

1. Cases of declaring expenses not in accordance with regulations

– Expenses that are not deductible when calculating corporate income tax according to regulations but the enterprise still declares them, leading to incorrect declaration of deductible expenses. In case the company is at a loss in the years being settled and the expenses are smaller than the loss, there will be no VAT or corporate income tax collection, but instead the tax authority will issue a decision to reduce the loss of the year being settled.

– The enterprise will not have to record any loss reduction in the books after this inspection decision. The enterprise will have to separately track this loss reduction as a basis for transferring losses to the following years on the loss transfer appendix form 03-2/TNDN of the corporate income tax finalization declaration (The continuous loss transfer period shall not exceed 5 years from the year following the year in which the loss occurred).

Example 2:

In 2021, the enterprise had a loss on the financial statements of VND 200,000,000. In 2022, there was a tax audit report for 2021 with the result of reducing the loss in 2021 by VND 50,000,000 due to declaring expenses over VND 20 million paid in cash.
➜ According to this result, the profit and loss carried forward at the beginning of the year is still VND 200,000,000 according to accounting.
➜ According to tax, the only acceptable loss is: 200 – 50 = VND 150 million. This number is the loss amount used as the basis for carrying forward the loss on the loss transfer appendix 03-2/TNDN if the enterprise makes a profit in 2022 or the following years (Maximum of 5 years from 2021).

>> See more: Tax declaration violations and tax reporting penalties.

2. Cases of administrative fines and late payment

– When a business makes an incorrect declaration leading to a shortage of tax payable, it will be fined according to Clause 1, Article 16 of Decree No. 125/2020/ND-CP dated October 19, 2020. The business will be fined an amount equal to 20% of the amount of tax to be collected.

– If the declaration is incorrect but does not lead to a shortage of tax payable, a penalty will be imposed according to Article 12 of Decree No. 125/2020/ND-CP dated October 19, 2020:

• Fines from VND 500,000 to VND 1,500,000 for acts of false declaration or incomplete declaration of indicators in tax records but not related to determining tax obligations.
• Fines from VND 1,500,000 to VND 2,500,000 for acts of false declaration or incomplete declaration of indicators on the tax declaration or appendices attached to the tax declaration but not related to determining tax obligations.
• Fine from 5,000,000 VND to 8,000,000 VND for false declaration or incomplete declaration of indicators related to determining tax obligations in tax records.

– When additional VAT and CIT are collected, the enterprise must pay additional late payment fees for those additional collected amounts. Late payment fees are calculated at 0.03%/day on the amount of late tax payment (According to Clause 3, Article 3 of Circular 130/2016/TT-BTC).

– Upon receiving the decision on administrative penalty and late payment in the tax settlement minutes, the enterprise records it in other expenses of the year in which the penalty decision is received:

• Debit account 811: Administrative fine or late payment;
• Credit account 3339: Fines payable.

When paying fines to the state budget, we account for:

• Debit account 3339: Late payment + administrative violation fines;
• Credit account 1111/1121: Fee amount payable to the state.

At the same time, when settling corporate income tax for the year of settlement, this penalty amount is not included in deductible expenses when calculating corporate income tax.

Example 3:

Continuing example 1, suppose company A in 2021 is not subject to tax arrears but has a loss reduction of VND 100,000,000.

– Fine for incorrect declaration leading to VAT payable in 2020: VND 4,000,000 (20% of VAT collected).

– The amount of fine due to incorrect declaration leading to the amount of corporate income tax payable in 2020: VND 10,000,000 (20% of the amount of corporate income tax to be collected).

– Penalty for false declaration but not leading to a shortage of corporate income tax payable in 2021: VND 6,500,000 (Average level in Clause 3, Article 12, Decree 125/2020/ND-CP).

➜ Accounting:

• Debit account 811: 16,500,000 VND;
• Credit account 3339: 16,500,000 VND.

➜ When paying fines to the state budget:

• Debit account 3339: 16,500,000 VND;
• Credit account 1111/1112: 16,500,000 VND.

V. Frequently asked questions about adjusting entries after tax settlement