In order to meet the liability of certain types, this reseve is created. A liability may arise in future for which we are not aware of the exact amount. This is quite common in deciding the value of income taxes. The value estimated by the entity may be declared invalid by the tax authorities and in this case, they impose a different figure for tax liability.
However, there are situations in which, though the amount is confirmed for the liability but the entity is not sure whether it will be required to pay the amount. The common example is the incurance claim from the workers. Though, the entity is aware of the cliam amount, but it cannot predict whether this unpleasant event will happen with the workers or not.
Journal Entry
| Income tax expense | Debit | |
| Compensation claim | Debit | |
| Reserve for income tax payable | Credit | |
| Reserve for compensation clain payable | Credit | |
| Closing Entry | ||
| Income and Expense Summary | Debit | |
| Income tax expense | Credit | |
| compensation claim | Credit |