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Hi sir, i have a confusing issue. there is an extract from an example in the following:
A company`s trial balance shows a debit balance of $2.1 million brought forward on current tax..
the confusing matter is attributable to debit balance of current tax. i know that current tax account is payable account (liability). as a result it should be a credit balance brought forward instead of debit balance, isn`t it? can you explain it pls?If it had been a credit balance brought forward – that is, it was an estimated tax liability brought forward based on last year’s profits of, say, $18,000 – and then the company and the taxman agreed the tax liability was $19,000 – so $1,000 greater than the credit liability brought forward – and this amount was paid (so Dr Current Tax account, Cr Cash account) and that’s all that happens in the year right up until the year end
At the year end, the trial balance is extracted and … ooops! we have a debit balance of $1,000 in the Current Tax account
Now that’s one way in which the Current Tax account can have a debit balance shown on the trial balance
There is a second possibility … the company has suffered poor results this year and the company accountant (who has just passed his F6 exam!) realises that the company is due a tax refund because of the allowability of carrying back losses from this year and setting them against profits from earlier years
Tax (both current and deferred) could be a credit balance or a debit balance carried forward or brought forward
OK?
if we say debit balance in tax account, this means that tax authority will refund this amount to the entity. (tax owes to company), am i right? the full example is as following:
A company’s trial balance at 31 December 20X3 shows a debit balance of $700,000 on current tax and a credit balance of $8,400,000 on deferred tax. The directors have estimated the provision for income tax for the year at $4.5 million and the required deferred tax provision is $5.6 million, $1.2 million of which relates to a property revaluation.
What is the profit or loss income tax charge for the year ended 31 December 20X3?In calculation tax charge, it is stated that debit balance 700 000 on current tax is prior year underprovision. why? is not this amount the excess over that would be paid to tax authority? mean this should be overprovision amount, should not it?
I’ve just explained all this in my previous post!
Imagine last year we estimated the tax liability at $3.9 million
After extended negotiations with the taxman, we finally agreed that the amount payable should be $4.6 million
The brought forward amount at the close of last year’s records was a carried down liability of $3.9 million
And now we pay the agreed amount of $4.6 million
At the date of this year’s trial balance, we have a DEBIT balance on the current tax account
Is that an asset? Is the taxman going to send us a cheque?
Or is it an UNDERPROVISION from last year – we provided / estimated the liability to be $3.9 million and in fact we had to pay $4.6 million
OK?
aa ok. now it is clear. understood. thank you for your comprehensive explanation..
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