Under Provision Tax Formula

Under Provision Tax Formula

Provision of tax is made on the bases of best estimate; thus actual tax expense may differ from the provision created for tax expense. The difference is known as under/over provision for tax. Under provision result, when actual tax expense exceeds the provision amount.

Under Provision = Provision Created- Actual Expense

Actual Expense > Provision created = under provision

160,000> 140,000= 20,000 (under provision)

Under provision accounting Treatment

Under provision would increase the provision expense in next year, because previously low tax expense was charged; because the tax expense is more than provision created, therefore tax expense charge would be increased. This concept has been explained below

Under provision formula Example

Tax rate = 40%

Profit = 100,000

Actual tax = 50,000

Calculate under or over provision and pass journal entry?

Solution

Provision tax = 40,000

Actual Tax    = 50,000

Under provision = 10,000

First Year

Date	Particular	Dr.	Cr.
	Tax	40,000
	Provision		40,000

Second Year

Date	Particular	Dr.	Cr.
	Provision	40,000
	Tax Expense	10,000
	Cash		50,000

 Under provision formula Example

Tax rate = 40%

Profit (first Year)   = 100,000

Profit Second Year = 200,000

Actual tax second year = 50,000

Calculate under or over provision and pass journal entry?

Solution

Provision tax = 40,000

Actual Tax = 50,000

Under provision = 10,000

First Year

Date	Particular	Dr.	Cr.
	Tax	40,000
	Provision		40,000

Second Year

First Entry

Date	Particular	Dr.	Cr.
	Provision	40,000
	Tax Expense	10,000
	Cash		50,000

Second Entry

Date	Particular	Dr.	Cr.
	Tax	80,000
	Provision		80,000

Total expense for Year

Current year provision 80,000

Under provision          10,000

Total                          90,000