What is current tax

What is current Tax?

Current tax is tax calculated on the business income for the year. For example a business earns a profit of $ 20,000 and tax rate is 15%, then the current tax for the period is $ 3,000.

What is taxable profit?

Taxable profit is profit which is calculated as per applicable tax laws. There are number of adjustment is made in accounting profit to calculate the taxable profit. The adjustment is made because there may be expenses which are deducted as expenses but may not be allowed as tax deduction and vice verse.

What is tax provision?

The tax is calculated at the year end but is required to be paid in another year therefore a provision is require to be made. The word provision is more suitable because the tax liability still to be confirmed by the tax authority. What is under provision of Tax?

What is under provision of tax?

When the tax authority in next year confirms that actual tax is more than provision provided in last year, then this situation is known as under provision of tax. Profit and loss of current is charged with the amount of under provision.

What is journal entry for current Tax?

Current tax is expense for the business and therefore charged to profit & loss account. However normally tax is not claimed as tax expenses and therefore in income statement first profit is calculated and then tax is deducted therefore.

What is deferred Tax?

Deferred tax is advance taxation concept and it is accounting adjustment and mainly arises due to the timing difference of taxation i.e. temporary difference. Deferred tax play important role to reconcile the accounting and taxable profit of the organization.

What is permanent tax difference?

Permanent difference is an advance taxation concept under which difference between tax profits and accounting profit will not be eliminated by the time. For example entertainment expenses are not allowed as tax expense will not be eliminated by the passage of time.

What is temporary tax difference?

Temporary difference is a difference between accounting profit and taxable profit which will be eliminated by passage of time. Classic example of temporary difference is different deprecation rate used by the management and tax department.

What is tax base?

Tax bases are amount of value used for an asset or liability by tax authority for the purpose of taxation. Tax base is very important concept to calculate the temporary difference i.e. difference between carrying amount of an asset or liability and tax base.

When taxable temporary differences arise?

Taxable temporary difference arises when the carrying amount of asset or liability is more than tax base. Taxable temporary difference gives rise to deferred liability. Classic example of taxable temporary difference is initial allowance on non current asset or accelerated depreciation by tax authority.

When deductible temporary difference arise

Deductible temporary difference arises when the carrying amount of asset or liability is less than tax base. Deductible temporary difference will result in deferred tax liability. Classic example of deductible temporary difference is the provision of expenses on accrual bases where tax authority grants tax deduction on actual payment in future.

What is deferred tax liability?

In simple words deferred tax liability is a liability of tax which is required to be paid in future and it is arise due to the taxable temporary difference and calculated by applying the applicable tax rate on the taxable temporary difference.

What is deferred tax asset?

Deferred tax asset is an asset which will be released in future and arise due to deductible temporary difference and calculated by multiplying the deductible temporary difference with the applicable tax rate.