Hi
if my profit before tax (accounting) is 10,000 but taxable profit is 14,000 on the face of my Income statement, considering tax is at 20%
should it look like
1)
PBT 10,000
LESS TAX @ 20% = 2000
PAT = 8000
2) PBT 10000
LESS TAX @ 20% on 14000 = 2800
PAT = 7200
What will be the accounting entry?
Replies (4)
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Tax is paid on the taxable profit (PCTCT in my day).
Tax payable would therefore by 2,800
Accounting entry
DR CT P&L/Income Statement
CR CT creditor in the balance sheet.
Depending on the nature/materiality of the difference betwen the 10,000 and the 14,000, you may want to account for deferred tax.
Different differences
This isn't the real world is it? In fact, this is looking a lot like a homework assignment. You need to think these things through for yourself. If you put forward what you think to be correct, and your reasoning, then I'm happy to confirm or assist by correcting. I'm not just going to do your work for you. You won't get help in exams, so relying on it now is doing you no favours.
Here's a hint as to what to look for in your study books. Permanent or temporary difference?
I suggest you calculate the deferred tax liability of your hypothetical company and then reconcile the tax charge (including the movement in deferred tax) in the profit and loss account with your pre-tax (accounting) profit.
If you then want to post the results of your endeavours people will be glad to comment.