I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

charge for income tax on profits for the year is shown as a deduction from profit for the 

year. 

(b) 

In the statements of financial position, tax payable to the Government is generally shown as a 

current liability, as it is usually due within 12 months of the year end. 

(c) 

For various reasons, the tax on profits in the statement of profit or loss and the tax payable in the 

statement of financial position are not normally the same amount. 

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PART F: PREPARING BASIC FINANCIAL STATEMENTS 

 

354

 

3.7.1 Example: taxation 

A company has a tax liability brought forward of $15,000. The liability is finally agreed at $17,500 and 

this is paid during the year. The company estimates that the tax liability based on the current year's 

profits will be $20,000. Prepare the tax liability account for the year. 

Solution

 

TAX LIABILITY ACCOUNT 

 

 

$      

 

 

$       

Cash paid 

 

17,500 

Balance b/f 

 

15,000 

Balance c/f 

 

20,000 

Statement of profit or loss 

 

22,500 

 

 

37,500 

 

 

37,500 

Notice that the statement of profit or loss charge consists of the following. 

 

 

$      

Under-provision for prior year (17,500 – 15,000) 

 

2,500 

Provision for current year 

 

20,000 

 

 

22,500 

Notice also that the balance carried forward consists solely of the provision for the current year. 

3.8 Interrelationship of statement of profit or loss and statement of financial 

 position 

When we were dealing with the financial statements of sole traders, we transferred the profit for the year 

to the capital account. In the case of limited liability companies, the profit for the year is transferred to