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Hello sir, while attempting a question on retained earnings i came across this part : “The estimated tax charge for the year is $45 000 . The tax payable account shows a debit balance of $11 750.”
Could you please explain why a debit balance means an underprovision..ive understood it the other way round ..It is difficult for me to be certain without seeing the whole of the question.
However the reason is almost certainly this:
Just suppose that last year they had provided 50,000 for tax. There would be a credit balance of 50,000 on the tax payable account.
Suppose the amount they actually had to pay was 60,000 (and they paid it this year). It would mean that they had under-provided.
When they pay the 60,000 they would have debited tax payable and credited cash. This would mean they would end with a debit balance of 10,000 and it would be because they under-provided at the end of last year.
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