Provisions/Tax

Question 1

what are provisions?

Answer 1

liability of uncertain timing or amount

Question 2

under what conditions are provisions created?

Answer 2

if there is a present obligation for it (e.g. legal obligation) or if it is probable (more than 50% likely for the expense to occur)

Question 3

Steps for creating a provision (and their double entries)

Answer 3

1. create provision:
   Dr expense, Cr Provision
2. incur expense:
   Dr expense, Dr provision, Cr cash
3. remove excess provision (if expense less than amount provided):
   Dr Provision, Cr expense

Question 4

How are provisions for claims under warranty calculated?

Answer 4

do step 1 as normal

if increase in provision:
Dr expense, Cr provision

if decrease in provision
Dr provision, Cr expense

Question 5

how is tax treated?

Answer 5

as an expense

Question 6

how is unpaid tax treated?

Answer 6

as a current liability and tax payable

Question 7

double entry: tax liability identified

Answer 7

Dr tax expense

Cr tax payable account

Question 8

double entry: tax paid

Answer 8

Dr tax payable account

Cr cash

Question 9

is tax charge in P&L actual or an estimate?

Answer 9

an estimate because the P&L is prepared BEFORE tax charge is agreed. Because of this, it can be either under provision or over provision

Question 10

what are the affects of under and over provision this year, on the next year?

Answer 10

over provision this year means reduced total tax charge next year

under provision this year means increase tax charge next year