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Under provision is tax liability calculated using accounting profit was lower than tax liability calculated using tax rules.

Over provision is tax liability calculated using accounting profit was higher than tax liability calculated using tax rules.

Accounting profit is calculated based on accrual principle. Whereas, taxable profit is calculated on cash basis other than exceptional cases.

Difference is calculation between accounting and tax rules lead to different tax liability, as tax liability as calculated by applying tax rate on profits (accounting or tax)

Taxable profit for taxation purpose, calculated by making adjustments to published financial statements. Therefore, it is not possible to use taxable profit to arrive at profit after tax.

Tax expense and liability is included in financial statements to comply with prudence principle as it is probable that tax payment will result in outflow of cash from the entity and matching principle as tax payment are made for revenue generated.

1       Under Provision

Journal Entries

Tax expense                         DR

Tax liability                                 CR

(To record tax liability as at dec 2012)

Tax liability                           DR

Under provision                          CR

Cash                                                 CR

(To record under provision i.e. payment of tax during the year more than record in SOCI)

Tax expense                          DR

Tax liability                                   CR

(To record tax liability as at dec 2013)

SOCI (Extract)

Tax Expense                                     xx

Add: Under Provision                    xx

SFP (Extract)

Current Liability

Tax Liability                                      xx

Note: Under provision, will not recorded in SFP, as is paid for under provision during the year.

Calculation of tax liability is an accounting estimate made based on tax rate. Therefore, it is treated in accordance with IAS 8, Errors, Estimates & Accounting Policies.

IAS 8 states that accounting estimates should not be applied retrospectively (to previous years). Adjustments should only be made to the year when actual revenue or expenditure is known.

2       Over Provision

Journal Entries

Tax expense                            DR

Tax liability                                     CR

(To record tax liability as at dec 2012)

Tax liability                            DR

Over provision                                CR

Cash                                                    CR

(To record over provision i.e. payment of tax during the year more than record in SOCI)

Tax expense                            DR

Tax liability                                     CR

(To record tax liability as at dec 2013)

SOCI (Extract)

Tax Expense                                     xx

Less: Over Provision                     (xx)

SFP (Extract)

Current Liability

Tax Liability                                      xx

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