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Estimation of working capital

Nihar Ratadia (Student ) (40 Points)

11 October 2015

In estimation of working capital of CA IPCC of Financial Management, the question says "The newly formed company is paying 90% of Income Tax in advance in quarterly installments" and in the solution the balance 10% is over current liabilities. I don't know what to do with it. I am confused. Help

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3 Replies

Kaushik Sekar (Article Assistant) (66 Points)
Replied 12 October 2015

Payment due on taxes to the Government is an accrued expense and hence a liability for the company. The company has already paid 90% of the tax in advance in quarterly instalments. The remaining 10% is due to be paid and hence considered as a Current Liability.

Correct me if I am wrong.

Nihar Ratadia (Student ) (40 Points)
Replied 12 October 2015

Yeah 10% will come over liability side as it is outstanding but that 90% paid in advance won't come on Asset side??

Kaushik Sekar (Article Assistant) (66 Points)
Replied 13 October 2015

Hi NIhar. See, tax is an expense for the company. When expenses are paid as and when they are accrued, they go to the debit side of Profit & Loss Account. In case of delay in payment, it becomes a liability.

Advance tax is not an expense paid in advance. So it is not an asset.