8/3/2019 Tax Provision Accounting Theory | Assignments Help | ExpertsMind.com

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Accounting Theory| Tax Provision|Expertsmind.com

Tax Provision

(i) If given in profit & loss A/c

Profit & loss A/c

Particulars $ Particulars $

To provision for tax 5,000

If provision for tax is given in profit & loss A/c the same amount is treated as provision made and tax paid the

same amount is added to working note while calculating net profit before tax and deducted from operating

activity.

(ii) If given in balance sheet

Cash: when provision for tax is given in balance sheet but adjustment given:

Balance sheet

Liabilities 2006 $ 2007 $ Assets 2006 $ 2007 $

Provision for tax 50,000 75,000

Last year amount is treated as tax paid and deducted from operating activity.

Current year amount is provision made during the year and therefore added to working note.

Case II: When adjustment is given for tax and provision for tax also appears in balance sheet.

Balance sheet

Liabilities 2006 $ 2007 $ Assets 2006 $ 2007 $

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8/3/2019 Tax Provision Accounting Theory | Assignments Help | ExpertsMind.com

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Provision for tax 20,000 25,000

Adjustment: tax paid during the year $ 3,000.

Now. Provision for tax will be treated as non-current liability and provision for tax A/c is opened so as to find

the missing figure of either tax paid or provision for tax made during the year.

Provision for tax A/c

Particulars $ Particulars $

To bank A/c (tax paid) 3,000 By balances b/d 20,00

(deducted from operating activity) By profit & loss A/c (bal fig) (provision made) 8,000

To balances c/d 25,000 (included in net profit before tax)

28,000 28,00

Case III: When provision for tax is not given in balance sheet but adjustment is given for it.

Balance sheet

Liabilities 2006 $ 2007 $ Assets 2006 $ 2007 $

Provision for tax Nil Nil

Adjustment: tax paid during the year $ 3,000.

Here, it is assumed that the same amount of tax paid during the year has been provided (made) during the yea

Therefore the same amount is added to working note as provision for tax made the year and subtracted unde

operating activity as tax paid during the year.

Proposed dividend

(i) If given in profit $ loss A/c

Same treatment is given like provision for tax but the only difference is that the amount of dividend paid is

shown as outflow under financing activity]

8/3/2019 Tax Provision Accounting Theory | Assignments Help | ExpertsMind.com

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(ii) If given in balance sheet

Dividend on equity and preference share on percentage basis

Balance sheet

Liabilities 2006 $ 2007 $ Assets 2006 $ 2007 $

Equity share capital 1,00,000 1,50,000

8% pref: share capital 5,00,000 70,000

Adjustment: dividend on equity shes is to be allowed @ 10% p.a

Solution: Dividend is always allowed on opening capital balances if date of issue is not mentioned.

Note: here is assumed that the same amount of dividend has been provided (made) and paid during the curren

year. Therefore the same amount of dividend is added in working notes while calculating net profit before tax

and shown as outflow under financing activity.

Interim dividend: it is he dividend paid during the accounting year in the anticipation of higher profit at te end

the year. This dividend is paid and made during the same year. Therefore same amount I striated as dividend

paid [financing activity) outflow)] and revision made (added to wok gin note while calculating net profit before

tax)

When debtors are good

In this case provision for doubtful debts/bad debts treated as non-current item like accumulate profit general

reserve etc.

(i) When provision is increasing the differences added to working notes while calculating net profit before tax.

(ii) When provision is decreasing the difference is subtracted from working notes while calculating net profit

before tax.