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Current tax:

Companies have to pay tax on taxable profits. The tax charge is normally ESTIMATED at the end of the financial year and charged to the statement of profit or loss and other comprehensive income, and paid in the following year.

The double entry for taxation would be:

DR Taxation expense       (Statement of profit or loss and other comprehensive income)

CR Taxation liability         (Statement of financial position)

 

The double entry for when the tax is paid a few months later:

DR Taxation liability        (Statement of financial position)

CR Bank                    (Statement of financial position)

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Since the amount paid is likely to differ from the estimated tax charge originally recognized, a balance will be left on the taxation liability account being an under or over provision of the tax charge.

 

Deferred tax

Concept:

So we know that deferred tax is a future obligation to be settled by company depending on the future tax law. So deferred tax does not necessarily fulfill the liability definition (present obligation).

Deferred tax arises because of temporary differences (TD). Temporary difference is the difference between CV and TB.

DT=TD* X CT%

*TD=CV – TB

TD:Temporary difference between carrying value and tax base

CV:  Carrying value of asset/liability.

TB:tax base in the tax man’s book.(in real practice we will try to refer to different tax regulations to calculate the tax base)

DT:Deferred tax liability/asset

CT%: Corporation tax rate

Deferred tax is a future liability recognized today. And deferred tax is based on temporary difference (timing difference between accounting and tax law). So the amount we owe to the tax authority will be finally paid back to them in the subsequent years.