Learning Objectives:
At the end of this chapter you will be able to:
Identify the amount of tax to be recognised in the statement of financial position and the statement of profit or loss
Account for adjustments in respect of over or under-estimated tax in prior periods
Contents:
1 Tax in the financial statements
2 Tax example
3 Summary
3 Further reading and questions
1 Tax in the financial statements
When the provision for a company’s income tax is made in the accounts, it is an estimate. The final amount will be agreed with the tax authorities at a later date.
The double entry to record this tax estimate is:
DR Tax expense (P/L) x
CR Tax payable (SoFP) x
Any difference between the original estimate and the actual amount paid will be adjusted in the following year.
Tax in the Financial Statements
The taxation payable in the statement of financial position will always be the current year estimate. This is because the prior year’s tax will have been paid during the period.
The taxation expense in the statement of profit or loss and other comprehensive income will be made up of this year’s tax estimate, as well as an adjustment for the prior year.
If last year’s estimate was higher than the eventual payment (an ‘over-provision’) then the expense is reduced in the current year.
If last year’s estimate was lower than the eventual payment (an ‘under-provision’) then the expense is increased in the current year.
The following pro-forma can be used:
Current year tax estimate x
Prior year over-estimate (x)
Prior year under-estimate x –––
Tax expense in profit or loss x –––
2 Tax example
CalcsRus Ltd estimated that the tax due on its profits for the year ended 31 December 2012 was £90,000.
On 1 October 2013, it settled its prior year tax bill for £88,000.
CalcsRus Ltd estimate that the tax due on its profits for the year-ended 31 December 2013 is £110,000.
Required
What is the accounting treatment of the above for the year-ended 31 December 2013?
Solution
The 2012 tax bill has been paid. CalcsRus Ltd’s liability for the year-ended 31 December 2013 is the current year tax bill only. Therefore the liability on the statement of financial position is £110,000.
The statement of profit or loss and other comprehensive income will include the current year tax expense but also an adjustment for the prior year. CalcsRus estimated that their tax on the 2012 profits would be £90,000 but they only paid £88,000. They therefore over-estimated the prior year expense by £2,000.
The expense in 2013 can be calculated as follows:
£
Current year tax expense
110,000
Prior year over-estimate
(2,000)
Prior year under-estimate
–
–––––––
108,000
–––––––
Alternatively, this can be presented in a T account:
Tax payable
Cash 88,000
Bfd 90,000
Cfd (c/y estimate) 110,000
Profit or loss (bal. fig) 108,000 –––––––– –––––––– 198,000 198,000
Task – Calculus
Calculus Ltd has been trading for one year. The accountant estimates that the company will need to pay tax of £30,000 on its profits for the year.
What is the double entry required to record the above transaction?
4 Further reading and questions
Further reading
For more detailed explanation, analysis and illustration of this topic please read chapter 7 of the Financial Statements text book.
Less detailed summaries can be found in chapter 7 of the Financial Statements pocket notes.
Additional tutor resources
Tutor’s question bank
Support Questions: Q 14
Advanced Questions: Q 47-48
These questions and answers may be printed off separately and distributed to students as necessary, to supplement the material listed above.
Learning Objectives:
At the end of this session you will be able to:
Classify a lease as either a finance lease or an
