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In the trial balance of SPQ Co, there is a credit balance of $900 on the tax liability account, an amount remaining after the settlement of the previous year’s liability.
The amount payable for the current year has been estimated at $27,400.
What amount should be shown as income tax in the statement of profit or loss?
The correct answer is $26,500.my answer is 28300 becasue i though last year there was an underprovision.
if there is a credit balance of 900 on tax liability account doesn’t it mean that we estimated a lower tax expense last year and it was actually higher since there is a credit closing balance in the liability account. if we estimated it higher than it actually was then shouldn’t there be a debit closing balance on the tax liability account? Pls help me out with this debit and credit confusion.The fact that they had a credit balance means that they were showing as still owing tax. However they didn’t owe anything because the liability has been settled. Therefore they had over-provided and the 900 is subtracted from this years liability.
If they over-provided last year then why is 900 credited? Should it not be a debit in the liability account?
When they provided last year they will have credited the account with the amount that they thought they would have to pay.
When the found out what the actual amount was and paid it then they will have credited cash and debited the tax liability. The fact that the actual amount was less than the amount provided (i.e. they have over provided) means that there will be a credit balance remaining on the account.
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