Current Tax underprovision b/f

Imagine you have a liability brought down from last year. The provision was estimated to be $6,000 tax payable, and it falls due for payment 4 months into the new year. Finally, towards the end of March, the tax liability was agreed with the Revenue as being $6,300.

This amount was paid on 1 May. Dr Tax account, Cr Cash

At the end of the year the trial balance is extracted and, when the tax account is balanced off, there’s a DEBIT balance of $300. Can you accept that this $300 balance represents an under-provision from last year?

Ok, let’s move on to the adjustment necessary at the end of this year.

The directors have estimated the tax liability should be $7,400. ( This accounting entry will be made AFTER trial balance )

We need to have a balance brought down of $7,400 in the tax account, below the “line” as a liability ( so B/d on the credit side of the T account )

Above the “line” on the debit side should be shown the other half of that previous entry. So, above the line on the debit side, write C/d $7,400.

Now, balance off the tax account. Add up the bigger side ( the debit side in this case ). Put the total figure $7,700 in the total line of the debit side of the account. Put the same amount $7,700 in the total line on the credit side of the account. Then add up the credit side and put in the missing figure which will make the credit side add up to $7,700

The double entry for that last 7,700 entry in the credit side of the tax account is a debit entry in the Statement of Income

Hope that helps

Why does it matter to you? It really is irrelevant for your purposes whether it’s an under-provision or an over-provision! If it’s a debit balance shown in the trial balance, then it’s a debit opening figure in your T account.

Ok, that tells you not to get hyper about it. Now let me explain.

We are looking at preparing financial statements for the year ended 31 December, 2013 and we are given a trial balance as at that date. Included within that trial balance are some accounts which will have changed only very little during the last 12 months and one of those is the current tax account.

Before I go further, you need to be ABSOLUTELY sure that you know the difference between the words “tax liability” and “tax charge” or “tax expense” – I mention this because it seems from your post that you are confusing the expressions.

A “tax liability” is the amount brought down, below the total lines in a T account, and is shown on the credit side of that account BELOW those double lines. To be able to find itself there, it must have been carried down from the debit side ABOVE the line.

A “tax charge” or “tax expense” is debited to the Statement of Income and the credit entry is in the current tax account, above the line

Right, back to the T account for current tax and “How can a debit balance be an under-provision?”

If the tax liability brought down from 31 December, 2012 had been, say, a credit balance of $8,000 and we finish up having to pay $8,600 to the taxman (because taxman disagreed with our tax computations) then we will debit current tax account and credit cash with $8,600. That now leaves a debit balance on the current tax account of $600 which will appear on the trial balance as a debit.

And that’s how a debit balance on the trial balance for current tax is the effect of a prior year under-provision

OK?

T accounts are so much easier – and require NO thought / memory

🙂

Read again my first post on this thread and put your figures into a T account following the steps from my first post

If you’ve still got a problem, post again

Cr Current Tax Account

As for the under provision / over provision – don’t beat yourself up about it! I have explained it in detail higher up in this thread but there really is no need to know! If the figure in the trial balance is on the debit side and the examiner says “the figure for current tax in the trial balance represents an under / over provision for taxation from the previous year” your reaction should be “how very interesting, but now let’s move on”

IF you really want to remember which it is (over- or under-), sing this to yourself:

“a debit balance brought forward on the current tax account is an UNDER PROVISION from last year”

Here’s a way that I’ve just this second thought of and it could work (it may not!)

“debit” and “under” both have 5 letters and add up to 10
“credit” and “over” have 6 and 4 letters and add up to 10

(But you don’t need to know!)

MAYBE?????!!!!!

There’s no “maybe” about it!

🙂

“on how they treated current tax amount stated in trial balance ($1,100m) as an over provision in previous year (refer suggested solution)” – the over-provision from the previous year has, in effect, allowed us to charge this year’s statement of profit or loss with just $800. If we had NOT accounted for last year’s over-provision, we would have charged $1,900 to this year’s statement of profit or loss as this year’s tax charge

That is the answer to the question that you have asked “on how they treated current tax amount stated in trial balance ($1,100m) as an over provision in previous year (refer suggested solution)”

But I’m not convinced that that is what you wanted to have explained to you

“on how they calculated deferred tax specifically a balance to be reflected in SPL” – there is NO deferred tax balance reflected in the SPL – and there NEVER IS a balance for deferred tax reflected in the SPL

So, again, I feel that this is not what you wanted

May I ask you to state clearly what your problems are and I shall get back to you

Open a Deferred Tax T account

There’s a credit figure brought forward according to the trial balance of 2,500

We are told that the revaluation gives rise to a deferred tax liability to carry forward calculated as 6,400 so that goes on the debit side with the narrative “carried forward” (you could short-cut this by taking it straight to the revaluation reserve, but I haven’t in the hope that it’s clearer this way!)

And there’s also 2,000 to carry forward for the deferred tax on other timing differences so that too is on the debit side

Now, that 6,400 that related specifically to the revaluation surplus needs to be debited in the Revaluation Reserve account so …..

Dr Revaluation reserve 6,400
Cr Deferred tax account 6,400

So the Deferred tax account now has a credit entry of 2,500 brought forward, 6,400 both debited and credited, and a carry forward amount shown on the debit side of 2,000

That leaves a balance of 500 on the debit side and that is credited to the current tax account

Does that sort it out for you?

You’re welcome

WHY ARE YOU SHOUTING?

Lower case is fine!

1) The tax charge is the amount that is double entered from the Current Tax Account to the Statement of Profit or Loss Account. There are no items included … it’s the balancing figure from the Current Tax Account

That balancing figure is arrived at following the various double entries that may have had an affect on the Current Tax Account such as an over- or under-provision from the previous year brought forward, the estimate of the liability to tax based on this year’s tax computations, the transfer of the balancing figure from the Deferred Tax Account representing the movement this year in that account

2) I have no idea what you are talking about! IF you’re talking about the calculation of tax paid in a cash flow question, then yes, we do add up the figures from the two T accounts.

Why? because it’s easier and quicker when trying to find the figure for tax paid in a cash flow question.

There is no rationale involved … it’s simply the aggregation of two separate accounts both of which deal with tax. If there had also been a value added tax account and a sales tax account and an employment tax account … we would have added them all together in our calculations to arrive at tax paid

But, don’t panic! There is NO CHANCE that there will be any tax accounts involved other than current tax and deferred tax

OK?