Provision for tax and Tax Paid: Treatment in Cash Flow Analysis

Case 1. No additional information given in adjustments

Balance sheet as at

Liabilities 31.3.2020 31.3.2021 Assets 31.3.2020 31.3.2021

Provision for Tax 18,000 30,000

Solution 1.
Tutorial notes:
1. Provision tax for any previous year (=financial year) is annual current liability, it should be paid next
year before due date of filing the return. Hence provision of Rs. 18,000 belonging to Previous year
2020 must be paid before 31st July 2020(assumed due date of filing the return). Unless other
information is given, we will assume that it had been paid.
2. Provision of tax for current financial year 2020-21 of Rs. 30,000 must have been made from Profit
& loss Account of the current FY. It also means that no tax liability is outstanding related to previous
financial year 2019-20. It will be paid during next FY 2021-22.

Accounting Treatment:
Provision for Tax A/c
To Bank ( = old 2020 provision) 18,000 By Bal b/d 18,000

To Bal C/d 30,000 By P/L a/c (= Current 2021 provision) 30,000

48,000 48,000

Treatment in Cash Flow Analysis:

1. Add back current provision for tax Rs. 30,000 to arrive at Net Profit before Tax.
2. Deduct Tax paid during current FY 2020-21 Rs. 18,000 from Cash Generated from
operations to arrive at Cash Flow before EOIs.

Case 2. Tax paid (= previous provision) during the year given in adjustments
Balance sheet as at

Liabilities 31.3.2020 31.3.2021 Assets 31.3.2020 31.3.2021

Provision for Tax 18,000 30,000

Income tax paid during the year Rs. 18,000

Solution: Same treatment as given above. Tax paid is given clearly. No assumption needed.

Rankers Classes May 31, 2022 Page 1

Case 3. Provision for Tax made (= current provision) during the year given in
adjustments
Balance sheet as at

Liabilities 31.3.2020 31.3.2021 Assets 31.3.2020 31.3.2021

Provision for Tax 18,000 30,000

Provision for Tax during the year Rs. 30,000

Solution: Same treatment as given in case 1. Provision for tax made during current financial
year is given clearly. No assumption needed.

Case 4. Tax paid (different amount than previous provision) given in

adjustments
Balance sheet as at

Liabilities 31.3.2020 31.3.2021 Assets 31.3.2020 31.3.2021

Provision for Tax 18,000 30,000

Income tax paid during the year Rs. 14,000

Solution:
Tutorial note: Ideally company should have paid Rs. 18,000. But payment of Rs. 14,000
may signify that company might have re-computed actual tax obligation lower by Rs. 4,000
(18,000-14,000) related to FY 2019-20. It also means that company will have to make lower
provision for the current FY by above saving of Rs.4,000. Here it is assumed that current
provision requirement is same Rs. 30,000 as carried and shown in balance sheet.
Accordingly: -
Provision for Tax A/c
To Bank (given in adjustments) 14,000 By Bal b/f 18,000

To Bal c/f (final amount of provision By P/L (balancing figure, provision made
for tax required for the current FY) during year)
30,000 26,000

44,000 44,000

Rankers Classes May 31, 2022 Page 2

Case 5. Provision for Tax made during the year (different from amount
of current FY) given in adjustments
Balance sheet as at

Liabilities 31.3.2020 31.3.2021 Assets 31.3.2020 31.3.2021

Provision for Tax 18,000 30,000

Provision for tax made during the year Rs. 26,000

Solution:
Tutorial note: Ideally company should have provided Rs. 30,000 during current FY. But
making provision of Rs. 26,000 signifies that company had balance in old provision of Rs. 4,000
(30,000-26,000) related to FY 2019-20. It also means that company had paid lower amount of
tax for the previous FY by that amount Rs. 4000.
Accordingly: -
Provision for Tax A/c
To Bank (balancing figure) 14,000 By Bal b/f 18,000

To Bal c/f (final amount of provision By P/L (given in adjustments, provision

for tax required for the current FY) made during year)
30,000 26,000

44,000 44,000

Case 6. Advance Tax paid given in Balance Sheet. No adjustment given

below balance sheet.
Balance sheet as at

Liabilities 31.3.2020 31.3.2021 Assets 31.3.2020 31.3.2021

Provision for Tax 18,000 30,000 Advance Tax 17,000 28,000

Solution:
Tutorial note:
1. Tax liability for previous FY is Rs. 18,000 but advance tax paid during previous FY was Rs.
17,000. It means Balance Rs. 1000 was paid during current FY before due date of filing the
return. In addition to this Advance Tas. Rs. 28,000 was also paid during current FY. Total Tax
paid during current FY Rs. 1,000+28,000 = Rs. 29,000.
2. There will be no entry of Current Year’s Advance Tax of Rs. 28,000 in Provision for Tax
Account of Current year. It will be adjusted in next financial year while determining and paying
tax finally.

Rankers Classes May 31, 2022 Page 3

Accordingly: -
Provision for Tax A/c
To Advance Tax a/c 17,000 By Bal b/f 18,000

To Bank (18,000-17,000, bal. fig) 1,000 By P/L (provision made during year = 30,000
closing balance of provision for tax)
To Bal c/f 30,000

44,000 44,000

Treatment in Cash Flow Analysis:

1. Add back current provision for tax Rs. 30,000 to arrive at Net Profit before Tax.
2. Deduct Tax paid during current FY 2020-21 Rs. 29,000(1,000+28,000) from Cash
Generated from operations to arrive at Cash Flow before EOIs.

Case 7. Advance Tax paid given in Balance Sheet. Information about

tax paid also given in adjustment below the balance sheet.
Balance sheet as at

Liabilities 31.3.2020 31.3.2021 Assets 31.3.2020 31.3.2021

Provision for Tax 18,000 30,000 Advance Tax 17,000 28,000

Total amount of Tax paid during current financial year Rs. 29,000.

Solution: Same as in case 6 above.

Rankers Classes May 31, 2022 Page 4