Fund Flow Statment - Doubt ??

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QUESTION :

 

Liabilities

Amount (31.03.2008)

Amount (31.03.2009)

Assets

Amount (31.03.2008)

Amount (31.03.2009)

 

 

 

 

 

 

Provision of Tax

70,000

1,00,000

Advance Tax Payment

80,000

1,05,000

 

 

 

 

 

 

 

Additional Information :

i)                    During the year, income tax for the year 2007-08 was assessed at Rs. 76,000. A cheque of Rs. 4000 was received along with the assessment order towards refund of income tax paid in excess, by way of advance tax in earlier years.

 

SOLUTION :

 

Sources of fund :

-          Refund of Income tax : 4,000

 

Application of Fund :

-          Payment of tax : 1,05,000

PROVISION FOR TAXATION A/C

 

Particulars

Rs.

Particulars

Rs.

To Advance tax payment A/c

76,000

 

By Balance b/d

70,000

 

To Balance c/d

1,00,000

By P/L A/c (additional provision for 2007-08)

 

6000

 

 

 

By P/L A/c (provision for 2008-09)

 

1,00,000

 

1,76,000

 

1,76,000

 

I have doubt only in red indicated figure.

Why are we creating provision again for 2007-08 in current year, while the same has already been paid during previous year as Advance tax. ? Please help

Replies (2)

Hi Krishna!

We are creating additional provision of Rs 6000/- because the income for 2007-08 has been assessed to be Rs 76,000/- while we had made provision for Rs 70,000/- only.That means there was a short provision for year 2007-08.

 

When we receive refund of Rs 4000/- the same will be credited to Advance tax payment a/c and with that entry the entry for previous year's Rs80,000/- advance tax payment gets closed i.e Rs 76000 actual liability and Rs 4000/- refund.

 

As given in your solution the 76000/- liabilty is adjusted against advance tax and now the debit against the original provision of Rs 70000/- is higher by 6000/- .Now this 6000/- can only be closed by charging it to P&L a/c and that is nothing but creating additional provision of 6000/- to close the provision for tax made for the year 2007-08.

 

hOPE tHIS Helps you! GOD BLESS!

Thank u so much Abhishek, Nice Explanation, now i have got my answer.

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