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Hi
At the end of the year, there is an over provision of 500 in the trial balance.
the estimated tax for the current year is 3000.
when we prepare the profit/loss account, we use 3000-500 as tax expense.
but in the balance sheet, we use 3000 as in current tax liability.
why?
Just suppose that last year they estimated that the tax would be (say) 5000.
They would have shown 5000 as an expense in the Statement of profit or loss, and 5000 as a liability in the Statement of financial position.Suppose when they actually get the tax bill it turned out to be only 4500. So…the pay the 4500 but this would still leave 500 on the t-account as a liability (even though of course there isn’t one) and it would still be sitting there at the end of this year and be listed on the trial balance. It also means that the expense in last years Statement of profit or loss was 500 more than it actually should have been.
At the end of this year, we estimate that 3000 is owing for this year. So we want to have a liability of 3000 on the t-account and therefore show 3000 in the Statement of financial position. Since there is already 500 in the account, we only need to increase it by 2500, and this is the expense that we will show in this years Statement of financial position.
So……because last year the expense was 500 more than it really should have been, it means that it is effectively corrected this year – this years expense is 500 less. (We can’t go back and change last years accounts and so it is ‘corrected’ this year.
I hope that makes sense 🙂
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