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I am finding it really hard to understand deferred taxation. Is there any logical method that I can use to work out the figure that goes in the income statement, Current liabilities and long term liabilities?
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with deferred tax, it is actually simple, check the provision already in the trail balance. if Q says to increase the provision, current tax payable will increase if Q says opposite, it will reduce the tax taken to income statement. lso look out for under/over tax provision in the previous years. Hope this helps.
The examiner will either say “The deferred tax provision to carry forward is …” or “temporary timing differences of say 30,000 ….and the tax rate is 25%” So, multiply differences ( 30,000 ) by tax rate = 7,500. Now, look at deferred tax provision brought forward and compare with this 7,500. If brought forward is less than our calculated figure ( here 7,500 ) the excess needs to be used to increase the tax charge in the income statement. In a question he will say also “The tax liability based on this year’s profits is estimated to be ….” ( say 18,000 )
Therefore, our tax CHARGE in this year’s income statement will be 18,000 + 7,500 = 25,500
One smalla djustment may be necessary – in the trial balance there may be a brought forward under / over provision ( or under / over payment ) from last year.
Now you need to apply your double entry knowledge! If the figure brought forward in the trial balance is a credit amount, say 1,000, this will REDUCE the tax charge of 25,500 leaving 24,500 to charge to the income statement. Obviously, if it’s a debit amount brought forward in the trial balance, this will INCREASE the tax charge in the income statement.
Try the mini-exercises at the back of the course notes – that’s why they’re there – to give you some practice on something which, almost certainly, WILL be in question 2.
Hi Mike, makechina,
thanks very much for your help. I finally understand deferred taxation… and now that i understand it its sooooo easy! Using T accounts is how i understand it better.
🙂
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