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Hi:)Its really confusing to calculate under and over provisions of tax because of the words used.Estimated tax means the tax expected by the tax authorities and actual paid means paid by the entity right?
$ $ $
Current tax estimate (year 1)30,000 (year 2)36,000 (year 3)33,000
Amount paid (year 2)28,900 year 3(37,200 )?
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Under/(over) provision( year 2)(1,100) (year 3)1,200 ?
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So if we paid 1100 less tax then in the next year we should add it and the 1200 should be deducted but kaplan is deducting 1100 and adding 1200 instead.Is that a mistake?“Estimated tax means the tax expected by the tax authorities and actual paid means paid by the entity right?”
“Estimated liability” is the liability calculated by the entity at the end of the year. They then send their tax computation in to HMRC. The taxman looks at the computation, checks it, amends it where necessary and then tells the entity how much is due
So, at the end of the year, the estimated liability is carried down from debit above the line to credit below the line
The liability brought forward from the previous year will have been amended (probably) by HMRC and so the amount paid this year to settle that brought forward liability will (in an exam) not likely be the same as the liability brought forward
Looking at the figures in your post:
In year 2, in a T Account for Current taxation we have on the debit side:
Paid 28,900
Carried down 36,000and on the credit side we have:
Brought forward 30,000
Income statement 34,900Can you see how that 1,100 that we didn’t have to pay has been deducted from the estimated liability carried forward to give us the figure that is charged to the statement of profit or loss?
Similarly, for year 3 we have on the debit side:
Paid 37,200
Carried down 33,000and on the credit side we have:
Brought forward 36,000
Income statement 34,200Can you see how that 1,200 extra amount that we had to pay has been added to the estimated liability carried forward to give us the figure that is charged to the statement of profit or loss?
If you tackle this issue with T Accounts, it all becomes much clearer (at least, it does for me!)
OK?
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