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Hello. I am getting lost in income tax chapter… It would be very great if you could help me to understand the concept of “income tax” T acount.
For example, Chapter 15, Practice question 1, it says that “Bright Plc’s trial balance showed the debit balance of $2,450″ on the current tax account and …”.
I don’t understand what it means… If there is debit balance in the current tax account, what it means.In my understanding, tax account = tax payable, so it is one of liabilities, so it should be always be on credit side. If there is the balance in Dr. side as B/F, it looks like we paid too much tax before, which looks weird.. I assume my understanding is wrong. Could you please correct my understanding. What is the meaning of Dr. balance of tax account as B/F?
Thank you very much!
It is effectively saying that you have not accrued enough tax in the prior year. So, we may have accrued for $100 at the end of last year but were then told to pay $120 subsequently. The $20 difference is what we did not accrue for last year and so we need to include it as part of this year’s tax expense as we do not go back and change the accounts last year as it was just an estimate. This $20 is a debit balance on the tax account, hence an opening debit balance on the left of the T-account.
Thanks
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