Fund Flow Statment - Doubt ??

A/c entries 723 views 2 replies

Krish

CA Final

3331 Points Joined July 2009

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)

abhishek

CA FINAL

274 Points Joined July 2008

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!