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- April 10, 2018 at 7:28 pm #446028
Sir,
Why is a credit in the tax payable account means an over provision of tax related to last year ?
April 10, 2018 at 8:16 pm #446041Open a current tax T account and put in the estimated tax liability based on this year’s profits say $3,000 (that’s a debit entry of $3,000 above the total lines with a narrative of ‘carried down’ and a corresponding credit entry of $3,000 below those total lines with a narrative of ‘brought down’
Now balance off that current tax account (debit profit or loss account $3,000 and credit current tax account $3,000)
So those two entries now reflect the expense in the profit or loss account $3,000 and the liability for inclusion on the statement of financial position $3,000
But when the year’s tax liability is finally agreed with the taxman, it could well be that our estimate of $3,000 was overly pessimistic and we finish up having to pay cash of $2,800
Enter tat into our current tax account (debit current tax $2,800 credit cash $2,800)
Where has that left our current tax account? There’s a credit balance of $200 ($200 more credit than debit)
And that’s how a credit balance in the current tax account can represent an over-provision of last year’s estimated tax liability
OK?
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