Example: Advance Tax, Provision for Tax and Entries subsequent to Assessment

Case 1 Advance tax, provision for tax and assessed tax being the same amounts

Financial Year 2009-10

Closing Balance of Advance Income Tax (Asset) = 40
1

Provision for Income Tax (Liability) = 40

Financial Year 2010-11

1. The company paid advance tax of 25 for this year. For the year, the profit before tax for reporting
purpose was 80 and for the tax purpose (in accordance with the provisions of the Income Tax Act)
was 100. The tax rate was 30%. This rate would be applied on 100 (and not on 80) and hence,
provision for tax for 2010-11 would be 30.

2. Assume that the assessment for FY 2009-10 is not done. Hence,

Closing balance of Advance Income Tax (Asset) = 40+25=65
Provision for Income Tax (Liability) = 40+30=70.

Financial Year 2011-12

1. Assume that the assessment for FY 2009-10 was completed during 2010-11 and actual tax liability
was assessed to be 40. At this stage, the advance tax paid in 2009-10 and provision for tax in 2009-
10 need to be adjusted.
Entry: Provision for income tax Dr 40, Advance Income Tax Cr 40 (both pertaining to FY 2009-10).

After this entry is done:
Closing balance of Advance Income Tax (Asset) = 65-40=25 (related to FY 2010-11)
Provision for Income Tax (Liability) = 70 40=30 (related to FY 2010-11).

2. The company paid advance tax of 35 for this year. For the year, the profit before tax for reporting
purpose was 100 and for the tax purpose (in accordance with the provisions of the Income Tax Act)
was 90 The tax rate was 30%. This rate would be applied on 90 and hence, provision for tax for 2011-
12 would be 27.

3. Assume that the assessment for FY 2010-11 is not done. Hence,

Closing balance of Advance Income Tax (Asset) = 25+35=60
Provision for Income Tax (Liability) = 30+27=57.


(Contd on page 2)


1
The income tax return for FY, say, 2009-10 is filed with the tax authority in 2010-11 (i.e. after the FY 2009-10
is over). Apart from the advance tax paid during 2009-10, a company can also pay some more tax at the time
of filing return (in 2010-11) related to FY 2009-10 if the advance tax paid in 2009-10 is found to be insufficient
in comparison to the provision for tax which is known only after 2009-10 is over. Such payment(s) is also
treated as Advance Tax for FY 2009-10 though paid in 2010-11. In short, any tax paid till filing of return
should be treated as advance tax.
Case 2 Advance tax > provision for tax and assessed tax =Provision for tax

Financial Year 2009-10

Closing Balance of Advance Income Tax (Asset) = 40
Provision for Income Tax (Liability) = 35

Financial Year 2010-11

1. The company paid advance tax of 25 for this year. For the year, the profit before tax for reporting
purpose was 80 and for the tax purpose (in accordance with the provisions of the Income Tax Act)
was 100. The tax rate was 30%. This rate would be applied on 100 (and not on 80) and hence,
provision for tax for 2010-11 would be 30.

2. Assume that the assessment for FY 2009-10 is not done. Hence,

Closing balance of Advance Income Tax (Asset) = 40+25=65
Provision for Income Tax (Liability) = 35+30=65.

Financial Year 2011-12

1. Assume that the assessment for FY 2009-10 was completed during 2010-11 and actual tax liability
was assessed to be 35 and a refund of 5 (advance tax of 40 assessed tax of 35) was received by
cheque. At this stage, the advance tax paid in 2009-10 and provision for tax in 2009-10 need to be
adjusted.
Entry: Cash/Bank Dr 05, Provision for income tax Dr 35, Advance Income Tax Cr 40 (both pertaining
to FY 2009-10).

(Note: If refund of 5 was not received then advance tax of 5 of FY 2009-10 would be carried
forward).

After this entry is done:
Closing balance of Advance Income Tax (Asset) = 65-40=25 (related to FY 2010-11)
Provision for Income Tax (Liability) = 65 35=30 (related to FY 2010-11).

2. The company paid advance tax of 35 for this year. For the year, the profit before tax for reporting
purpose was 100 and for the tax purpose (in accordance with the provisions of the Income Tax Act)
was 90 The tax rate was 30%. This rate would be applied on 90 and hence, provision for tax for 2011-
12 would be 27.

3. Assume that the assessment for FY 2010-11 is not done. Hence,

Closing balance of Advance Income Tax (Asset) = 25+35=60
Provision for Income Tax (Liability) = 30+27=57.







Revised: Case 3 Advance tax = provision for tax and assessed tax <Provision for tax

Financial Year 2009-10

Closing Balance of Advance Income Tax (Asset) = 35
Provision for Income Tax (Liability) = 35

Financial Year 2010-11

1. The company paid advance tax of 25 for this year. For the year, the profit before tax for reporting
purpose was 80 and for the tax purpose (in accordance with the provisions of the Income Tax Act)
was 100. The tax rate was 30%. This rate would be applied on 100 (and not on 80) and hence,
provision for tax for 2010-11 would be 30.

2. Assume that the assessment for FY 2009-10 is not done. Hence,
Closing balance of Advance Income Tax (Asset) = 35+25=60
Provision for Income Tax (Liability) = 35+30=65.

Financial Year 2011-12

3. Assume that the assessment for FY 2009-10 was completed during 2010-11 and actual tax
liability was assessed to be 40 and a demand notice for 5 (assessed tax of 40 advance tax
of 35) was issued to the company. On receipt of this notice, the company paid shortfall of
tax of 5 by cheque. At this stage, the advance tax paid in 2009-10 and provision for tax in
2009-10 need to be adjusted.
Entry: Income tax Expense of prior period (2009-10) Dr 05, Provision for income tax Dr 35, Advance
Income Tax Cr 35, Cash/Bank Cr 05.

(Note: Since the shortfall of 2009-10 is paid in 2011-12, this is shown in Income Statement distinctly
from Provision for tax (2011-12) as shown later).

After this entry is done:
Closing balance of Advance Income Tax (Asset) = 60-35=25 (related to FY 2010-11)
Provision for Income Tax (Liability) = 65 35=30 (related to FY 2010-11).

2. The company paid advance tax of 35 for this year. For the year, the profit before tax for reporting
purpose was 100 and for the tax purpose (in accordance with the provisions of the Income Tax Act)
was 90 The tax rate was 30%. This rate would be applied on 90 and hence, provision for tax for 2011-
12 would be 27.

3. Assume that the assessment for FY 2010-11 is not done. Hence,

Closing balance of Advance Income Tax (Asset) = 25+35=60
Provision for Income Tax (Liability) = 30+27=57.

Income Statement of 2011-12 would be as follows:
Profit Before Tax XXX
Less: Provision for (current) tax (FY 2011-12) 27
Less: Income tax of prior period (FY 2009-10) 05
Profit After Tax XXX-27-05
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