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Hi! I am failing to understand the logic behind how this works especially when there is an under provision.
If I estimate a tax liability of 2,300 and settle 2,350 during the year that leaves a credit balance of 50.
The next year I have an estimated tax liability of 2,400 (which is also a credit). Using the T accounts I can see that the total sent to the P&L will be 2,450 because I underprovided the ESTIMATED tax liability.
I can understand from using the accounting method why this is the case but I’m not grasping it from a logical perspective.
My question is logically if I paid 50 extra over the estimated tax liability, why aren’t I paying 2350 the next year.
The liability at the end of the year is only an estimate and it is only after the end of the year that we find out what the exact charge is.
If they end up paying 2,350 then the charge for the year should in fact have been 2,350. However cannot go back and change last years accounts, so we charge the extra 50 this year instead. So this years expense will be the estimate for this year plus the ‘correction’ of the 50 undercharged last year.
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