Provision for tax

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monia

monia (Querist)
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09 March 2009 I want to know what the provision for taxation is and why we make and treatment in accounts?

Manmohan ACA, CS

Manmohan ACA, CS (Expert)
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10 March 2009

Manmohan ACA, CS

Manmohan ACA, CS (Expert)
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10 March 2009 Provision for taxation (here in after called PFT) is a provision made for payment of tax.
A enterprise who liable to pay tax makes a provision at the end of financial on estimated basis.
moreover,as per income tax Act generally (i.e. is estimated tax is more then 5000) the enterprise also pays advance tax during the year.
In the assessment year when total tax payable if certainly known these three amount (a) total tax payable (b) provision made and (c) total advance tax paid till for the year is compared and adjusting entries is passed.
See
For creating provision
profit and loss A/c Dr
To PFT A/c

For payment of Advance tax
Advance tax A/c Dr.
To bank

When tax liability is finally decided
Step 1 PFT till made and tax liability is compared and balance transferred to P/L Appro.
Provision for tax A/c Dr. (PFT till made )
To P/L Appropriation (if tax liability > PFT)
To Income tax payable (total tax liability decided )
To P/L Appropriation (if tax liability advance tax ]
To Advance tax (advance tax till paid)
To Bank(if paid ) /outstanding income tax(is remain outstanding ) ( total tax liability decided < advance tax ]

Step1 and 2 can be merged

Provision for tax is shown as liability under current liability and provision
Advance
Provision for tax will appear as expenses in profit and loss account
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