Acca financial Accounting (FA) Study Text ac ca (FA)

Steps for recording income tax 

Step 1 

At the end of the year a company should make the following double entry for its 

estimate of the tax liability: 

Dr Income tax charges (P&L)  $X 

Cr Income tax liability (SFP)  

$X (a current liability) 

Step 2 

Following the year-end the actual tax liability will be calculated and paid. The 

associated double entry is: 

Dr Income tax liability 

$X 

Cr Cash 

$X 

Step 3 

It is unlikely the actual charge will match the estimated liability so the tax liability 

account will be left with a closing balance carried forward. This needs to be 

removed as the debt has been settled (i.e. there should not be any carried 

forward balances because the tax authorities have been paid the correct 

amount). 

If there is an overprovision in the prior year (i.e. estimate was greater than the 

amount paid) there will be a closing credit balance carried forward. This is 

adjusted as follows: 

Dr Income tax liability 

$X 

Cr Income tax charge. 

$X 

As the company overestimated, the charge for the following year is reduced by 

the appropriate amount so that, over the two-year period, the correct charge 

has been recorded. 

---