Tax Provision Accounting

Tax Provision Accounting

Tax provision is created, because tax liability is only best estimated about the tax expense. Actual tax may be different from the provision of tax, because actual tax amount is calculated by tax authorities and they may or may not be agree with the tax calculation performed by the company. some important point of tax provision account are listed below;

a)    Tax provision is current tax liability.

b)   Tax provision is accounting estimates of a tax liability.

c)    Tax provision estimate is made by the management.

d)   Tax provision may differ from the actual tax.

e)    Actual tax is calculated by the tax authorities.

f)     Under or over provision is treated prospectively in books of accounts.

Tax Under & Over Provision

In case actual tax is more than provided tax (provision of tax is lower than actual tax), then this is called under provision, where provision of tax is more than actual tax, and then it is called over provision.

Actual Tax Expenses > Tax provision (under provision)

Actual Tax < Tax provision (Over provision)

In case of under provision, the tax expense would be raised in next year and in case of over provision the excess amount shall be charged as income in next year. The both situation has been explained with example

Tax Under Provision Accounting

Under provision of tax would increase the tax in next year, as tax expense was under calculated in this year. This has been explained with an example

Applicable Tax rate = 20%

Profit for the Year = 300,000

Actual tax assessed = 80,000

Calculate under or over provision and pass journal entry?

Solution

Provision tax = 60,000

Actual Tax    = 80,000

Under provision = 20,000

First Year (Creation of Tax provision)

Date	Particular	Dr.	Cr.
	Tax	60,000
	Provision for Tax		60,000

Second Year (Payment of Tax)

Date	Particular	Dr.	Cr.
	Provision for Tax	60,000
	Tax Expense	20,000
	Cash		80,000

Tax Over Provision Accounting

There may be over provision of tax i.e. tax provided exceed the actual tax calculation made by the tax authorities. In this case the over provision amount is credited in the books of account. This has been explained with an example

Applicable Tax rate = 20%

Profit for the Year = 400,000

Actual tax assessed by Tax Authorities = 60,000

Calculate under or over provision and pass journal entry?

Solution

Provision tax (400,000 x 20%) = 80,000

Actual Tax assessed    = 60,000

Over provision = (80,000-60,000) =20,000

First Year (Creation of Tax provision)

Date	Particular	Dr.	Cr.
	Tax	80,000
	Provision for Tax		80,000

Second Year (Payment of Tax)

Date	Particular	Dr.	Cr.
	Provision for Tax	80,000
	P & Loss a/c		20,000
	Cash		60,000

Current Tax Accounting

Current Tax Accounting

Tax accounting broadly classified into current tax and deferred tax account. In this article we would discuss current tax accounting. The current tax is treated a business expense and charged in comprehensive income as expense. Current tax is recorded by the following entry

Tax is debited being the business expense and a liability is created with the name of provision for tax.

Date	Particulars	Dr.	Cr.
	Tax	$ xxx
	Provision for Tax		$ xxx

Current Tax Accounting Treatment

Some important characteristics of current tax are listed below

a)    Current Tax is a business expense.

b)   Current Tax is calculated at the end of the year.

c)    Current Tax is calculated as % of profit.

d)   Tax provision is created, because tax is to be paid in next year.

Current Tax Formula

Current tax is calculated as percentage of profit. Tax rate formula is given below

Current Tax = Profit x Tax rate

Current Tax Accounting Example

Profit = 150,000

Tax Rate = 25 %

Calculated and Record the Tax?

Solution

Tax = 150,000 x 25%

= 37,500

Tax expenses shall be debited and provision for tax would be credited in the books of accounts.

Date	Particulars	Dr.	Cr.
	Tax	37,500
	Provision for Tax		$ 37,500