Over Provision for Income Tax

Over Provision for Income Tax

Provision for income tax may be under or over estimated. When tax provision is greater than actual tax expense, then provision is called over provision  for tax. In other word , when Actual expense is lower than provisioned amount, then provision for tax is said to be over (Over provision for tax).

Over Provision = Provision Created- Actual Expense

Actual Expense < Provision created = Over provision

110,000> 140,000= 30,000 (Over provision)

 Accounting Treatment of Over Provision

Over provision would reduce or decrease the tax expenses for the year, because previously higher amount was charged to profit & loss, now those estimate needs to be revised, because actual tax payment figure are available. Over provision would reduce the tax expense in the next year (when actual tax is paid). Accounting Treatment of over provision for tax has been explained below with an example.

Over provision Example

Tax rate for the year = 40%

Profit for the year = 500,000

Actual tax = 150,000

Calculate under or over provision and pass journal entry?

Solution

Provision for tax = 40% x 500,000= 200,000

Provision tax = 200,000

Actual Tax    = 150,000

Over provision = 50,000 ( provision > Actual Tax Expense)

First Year (Provision Created)

Date	Particular	Dr.	Cr.
	Tax	200,000
	Provision for Tax		200,000

Second Year (Tax Paid)

Over provision in last year would reduce the tax expense. you can see the tax amount is being credited (reduced) in below entry.

Date	Particular	Dr.	Cr.
	Provision for Tax	200,000
	Tax Expense		50,000
	Cash		150,000

Over provision Example

Tax rate = 40%

Profit (first Year)   = 500,000

Profit Second Year = 700,000

Actual tax Paid in second year = 150,000

Calculate under or over provision and pass journal entry?

Solution

Provision tax = 200,000

Actual Tax     = 150,000

Over provision = 50,000

First Year

Date	Particular	Dr.	Cr.
	Tax A/c	200,000
	Provision for tax		200,000

Second Year

First Entry (Tax Paid)

Date	Particular	Dr.	Cr.
	Provision for Tax	150,000
	Tax Expense		50,000
	Cash		150,000

Second Entry (Provision Created )

Date	Particular	Dr.	Cr.
	Tax	280,000
	Provision for Tax		280,000

Total expense for Year

Current year provision          280,000

Less: Over provision              50,000

Total  Tax Expense               230,000

We can note that though provision in second is created, but tax expense is lower than provision created (due to over provisioning in last Year).