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Hello !
Assume amount in $000
In 2009, taxation in current liabilities (balance sheet) is 19 and in 2010, it is 25. In additional notes, it says there is no under or over provision of taxation.
The question asks first to calulate Profit Before Tax, which is calculated using Retained Earnings Ledger.
The question is: Why the examiner has used 25 as taxation figure in retained earnings (debit side) account and 19 as Tax Paid in Cash Flow Statement ?
Thanks in advance
Because the tax paid in the Cash Flow will be last year’s liability brought forward whereas in the calculation of Profit before Tax clearly we must use the tax calculated on this year’s profits ( and that’s the tax figure which will appear in NEXT YEAR’S cash flow )
thanks…it means the provision for taxation account is a permanent account and it does not get closed (also allowance for receivables)…right ????
Thanks
Hi
Not really. At each year end the company calculates the taxation liability based on that year’s profits ( say year 1 ). Clearly, at the end of the year ( 1 ), this liability is exactly that, a liability. This will be paid sometime in the next year ( 2 ). At that point ( if the tax had been calculated correctly ) then the balance / liability brought forward from year 1 would be eliminated by the tax payment in year 2 and the tax account would be brought down to zero. Then, at the end of the next year, ( 2 ), the same process is one through again. Calculate the tax on the next year’s ( 2 ) profits, create a liability at end year 2, and then pay that liability during year 3.
Is that clear?
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