Cutting Taxable Income in a Small Private Limited Company Through Accurate Journal Entries

Updated for FY 2026-27 (AY 2027-28).

Small private limited companies often end up with higher tax outflows because expenses are recorded late or without the supporting journal entries that the Income Tax Act recognises. The result is inflated profits and advance tax payments that could have been lower with routine bookkeeping changes. The practices below focus on entries that reduce taxable income while staying within the 25 percent corporate rate applicable when turnover stays below ₹400 crore.

Maximising Depreciation on Plant and Equipment

Purchase assets before 31 March and capitalise them correctly so the full year’s depreciation is available. For a ₹5,00,000 machine bought on 15 March, the block value increases immediately. The journal entry on purchase date is:

Depreciation is then charged at the prescribed rate through the profit and loss account. This single entry lowers the closing written-down value and reduces the current year’s taxable profit by the depreciation amount.

Timing Bonus Payments Before the Due Date

Pay bonuses to employees within the time limit allowed under the Payment of Bonus Act. A company that declares a ₹3,00,000 bonus on 20 March and pays it by 30 April can still claim the deduction in the current year. The entry on declaration is:

Clearing the payable in the next month does not disturb the deduction already taken.

Contributing to a Recognised Provident Fund

Employer contributions to a recognised provident fund up to the permitted percentage of salary are deductible when the payment is made before the due date for filing the return. For a monthly salary bill of ₹4,00,000, an employer contribution of ₹48,000 is recorded as:

The entry is supported by the challan and Form 3A so the amount is allowed without disallowance under section 43B.

Making Eligible Donations Under Section 80G

Donations to funds or institutions that qualify for 50 percent or 100 percent deduction reduce the tax liability directly. A ₹2,00,000 donation to an eligible research association is entered as:

The receipt with the 80G certificate is retained; the amount is adjusted in the tax computation after arriving at business income.

Charging Interest on Loans Used for Business

Interest on funds borrowed for business purposes is deductible when the loan is utilised and interest is paid or accrued consistently. On a ₹20,00,000 loan at 10 percent, the annual interest of ₹2,00,000 is booked monthly. The entry for one month is:

When the interest is actually paid, the payable account is debited and bank credited. This keeps the expense matched to the period it relates to.

Separating Repairs from Capital Expenditure

Routine repairs that keep an asset in working condition are revenue expenses, while improvements that increase capacity are capitalised. Replacing a ₹80,000 motor in existing machinery is recorded as:

The same amount spent on enlarging the machine capacity would instead be debited to the asset account.

Doing this in FlipAccounts

Create the journal entries above in the Journal screen under the relevant company. Use the Bank Reconciliation feature to match the bank statement lines against the cash or bank credits so the 43B payments are flagged automatically. The Tax Computation report then pulls the adjusted figures for advance tax planning.

What to do this week

• Review the fixed-asset register and post any pending depreciation entries before the month end.
• List all 43B expenses that must be paid before the return filing date and schedule the payments.
• Export the current trial balance and check that every donation receipt carries a valid 80G certificate.

Frequently asked questions

Can a company switch between the 25 percent and 22 percent rates every year?

No. Once a company opts for section 115BAA it must continue; the choice is made in the return and affects all subsequent years.

Is the journal entry enough or must the payment also be made?

For most expenses under section 43B the deduction is allowed only if payment is made before the return due date; the entry alone does not suffice.

How are capital gains on sale of depreciated assets taxed for a company?

The gain is treated as short-term or long-term depending on the holding period and taxed at the applicable corporate rate after adjusting for depreciation already claimed.

Does the company need to maintain separate books for each practice listed?

No. One set of double-entry books that records every transaction correctly is sufficient; the tax computation extracts the required adjustments from those books.

More guides