company accounts and tax

lgarside

Hello I'm currently doing the financial accounts module and I am a bit confused about the tax on the income statement and balance sheet.

Can some please explain the deferred tax, under/over provision and the normal tax provision. In an exmaple I was looking at the total was on the income statement e.g tax predicted to be 12,000 under provision from the previous year was 5,000 and the deffered tax was 10,000. On the income statement was 27,000. However on the balance sheet it showed the 12,000 as a current liability and the 10,000 (or the 5,000 not sure which) as a long term liability and the other figure wasn't anywhere.

If someone can explain what these figures are, why they are used and where they are used in relation to the financial statements I would be very grateful.

peugeot

You had me slightly confused with the figures in the last bit of paragraph 2 of your thread.

The £27k charge in the income statement represents:

£12,000 underprovision from prior years +
£5,000 charge for current year +
£10,000 movement on deferred tax account

The £12k provision is a correction of the prior year's corporation tax liability which must be written off to the income statement as it was underprovided in the prior year. The £5k is the charge on the current year's profits and the £10k movement on the deferred tax is an increase in the deferred tax account (deferred tax is only a provision, it is never paid). Deferred tax is the excess of capital allowances over book values of fixed assets and it merely acts to provide the tax payable if the business ceased to trade - hence being called a provision, rather than a liability.

In the balance sheet the £10k deferred tax balance would be shown as long term liabilities and the tax creditor should be the £5k tax charge on the current year's profits. The £12k under provision would have corrected the opening balance on the tax creditor account so:

If b/fwd tax creditor = £10,000
Tax paid was = £22,000
Opening creditor is understated by = £12,000

The entry for this underprovision would be to credit corporation tax creditor in the balance sheet and debit corporation tax in the income statement as the prior year's tax charge was understated, resulting in an understated creditor and overstated profits.

Hope that helps.

Kind regards
Steve