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Hi John
I’m a bit confused by something and would really appreciate if you could help me understand it:
“A trial balance shows a debit balance on the tax account of ‘x’ amount. This shows the balance after the prior year’s tax liability was paid”.
Firstly, how can a trial balance show a debit balance on the tax account? Does this mean as the same as saying there is a debit balance caused by the tax account?
Secondly, this amount is then added to the tax paid in the year to get the total tax paid in the year. This is confusing as I would have thought a debit balance on the tax account was a prepayment.
Suppose that at the end of the year we thought that 1,000 was owing for tax. Then we will have a credit on the tax account of 1,000.
Suppose that this year we got the bill for last years tax and it was actually 1,200. We will credit cash and debit the tax account with 1,200, which will mean a debit balance of 200 on the account.Last year we should really have shown 1,200 as owing but it is now too late to change last years figures, so it makes this years tax expense 200 higher than it otherwise would have been.
Hi John,
thank you.
I would like to ask one more thing if that is ok with you. If we overpaid tax last year, would that also be a debit entry on this account? If so how can we differentiate between the two?
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