Provision for Income Tax

Provision for Tax

provision for tax is calculated on the bases of the accounting profit. Actual tax calculation may be different from the provision made, because final tax expense is decided by tax authority . it means there may be under or over provision for tax. 

Provision for tax =Tax Rate x Accounting Profit

Provision for Tax Formula Example

Accounting Profit for Year = 150,000

Tax Rate = 40%

What would be the provision for tax?

Solution

Provision for tax =Tax Rate x Accounting Profit

=150,000 x 40%

=60,000 (Provision for tax)

 Provision for Tax Journal Entry

Date	Particulars	Debit	Credit
	Tax A/c	60,000
	Provision for Tax A/c		60,000

Provision for Tax Formula Example (Under Provision)

Accounting Profit for First Year     = 200,000

Accounting Profit for Second Year = 300,000

Tax Rate = 40%

Actual Tax in Second Year            = 90,000

What would be the provision for tax?

Solution

Provision for tax =Tax Rate x Accounting Profit

=200,000 x 40%

=80,000 (Provision for tax)

 Provision for Tax Journal Entry (First Year)

Date	Particulars	Debit	Credit
	Tax A/c	80,000
	Provision for Tax A/c		80,000

Provision for Tax Journal Entry (Second Year)

There will be two tax related entries in second year i.e. tax payment and second is provision creation.

First Entry

In first entry tax payment is made and under provided amount is charged to profit & loss account.

Date	Particulars	Debit	Credit
	Provision for Tax	80,000
	Tax (profit & Loss)	10,000
	Cash		90,000

Second Entry

In second entry provision is created for the year based on accounting profit.

Date	Particulars	Debit	Credit
	Tax A/c	120,000
	Provision for tax		120,000

It is to  be noted that in case of under provision (for last Year), tax expense for the current year increased by the amount of under provision.

Tax Expenses (under Provision)           10,000

Provision for Year                            120,000

Total Tax                                        130,000

Provision for Tax Formula Example (Over Provision)

Accounting Profit for First Year      = 200,000

Accounting Profit for Second Year = 300,000

Tax rate = 40%

Actual tax in second Year = 60,000

What would be the provision for tax?

Solution

Provision for tax =Tax Rate x Accounting Profit

=200,000 x 40%

=80,000 (Provision for tax)

 Provision for Tax Journal Entry (First Year)

Date	Particulars	Debit	Credit
	Tax	80,000
	Provision for Tax		80,000

Provision for Tax Journal Entry (Second Year)

First Entry

Date	Particulars	Debit	Credit
	Provision for Tax	60,000
	Cash		60,000

Second Entry

Date	Particulars	Debit	Credit
	Tax A/c	100,000
	Provision for tax		100,000

It is to be noted that due to over provision in last year, the current tax expense would be reduced by such amount.

Provision required for Year                 120,000

Unused Balance                                (20,000)

Provision Charged                             100,000