Adjustment in Final Accounts: Tax Adjustment

  

Adjustment in Final Accounts

Adjustment entry means not adjusted while preparing trial balance.

It is also known additional information.

Almost all the adjustment entry effects dual aspect.

One is debit and other is credit. 

There are a number of adjustments to be made while finalizing the financial statements.

But our discussion will be limited to the following adjustments (limited by the curriculum):  

 

MAJOR ADJUSTMENTS IN FINAL ACCOUNTS:

1	Dividend	13	Bad debts, provision and discount
2	Transfer to reserve and fund	14	Recovery of bad debts
3	Adjustment of tax	15	Goods loss by fire and insurance claim
4	Closing stock	16	Goods distribute as free sample
5	Outstanding expenses	17	Manager’s commission
6	Prepaid expenses	18	Bonus or pension to employees
7	Accrued revenue  or income	19	Create reserve or fund
8	Unearned or prepaid revenue	20	Goods sold on sale or return basis
9	Depreciation on assets	21	Hidden adjustment:
10	Appreciation on assets		(a) Interest on loan or debenture
11	Written off or amortized		(b) Interest on investment
12	Purchase or sale of fixed assets		(c) Monthly rent and salary

 

Tax Paid and Provision for Tax

Every organization, which is registered in value added tax (VAT); goods and service tax (GST) and permanent account number (PAN) has pay tax to the government.

Tax is annual expenses for the organization but it is revenue for the government.

Organization needs to pay tax to the government on the basis of turnover and profit position of the company.

 

If organization is established in backward area, the government can provide some tax subsidy or exemption to the organization; it is called tax credit or exemption.

It is the tax benefit provided to the business by the government.

There are different adjustments of tax in final account; some of them are:

(a) Advance tax or tax paid in advance

A joint stock company needs to pay tax on the basis of its net profit.

A company needs to pay tax within six months after the end of every fiscal year.

Therefore, any income tax paid before or end of fiscal year is treated as advance tax paid.

If advance tax or tax paid is given in trial balance, it is treated as assets and recorded on the assets side of balance sheet.

 

ADJUSTMENT: 3A

Extracted Trail Balance

Particulars	Debit	Credit
Advance tax paid	10,000

Required: Show in balance sheet

SOLUTION:

Extracted Balance Sheet

Liabilities	Amount	Assets	Amount
		Loan and advance:
		Advance tax paid	10,000

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(b) Tax paid and provision for tax given in trial balance

If tax paid and provision for tax is given in trial balance, both accounts are related to previous year.

Therefore, both the account should be adjusted in profit and loss appropriation account.

ADJUSTMENT: 3B

Extracted Trial Balance

Particulars	Debit	Credit
Tax paid	50,000
Provision for tax		35,000

Required: Show in profit and loss appropriation account

SOLUTION:

Profit and Loss Appropriation (Retained Earning) Account

Particulars	Amount	Particulars	Amount
To Tax paid (last year)	50,000	By Provision for tax (last year)	35,000

 

 

(c) Provision for tax given in additional information

If provision for taxation is given only in additional adjustment, it is treated as provision for the current fiscal year.

It is debited in profit and loss account and is shown in liability side of balance sheet. 

 

ADJUSTMENT: 3C

Extracted Trial Balance

Particulars	Debit	Credit
Tax paid	Nil
Provision for tax		Nil

Additional information:

·          Provision for taxation for the current year is Rs 32,000

Required: Show in profit and loss account and balance sheet

SOLUTION:

Profit and Loss Account

Particulars	Amount	Particulars	Amount
To Provision for tax	32,000

 

Balance Sheet

Liabilities	Amount	Assets	Amount
Provision:
Provision for tax	32,000

 

(d) Provision for tax given in trial balance as well as additional information

Provision for taxation given in trial balance is taken as previous fiscal year.

It is shown only in credit side of P&L appropriation account (or liability side of balance sheet).

But provision for tax is given in additional information is recorded debit side of profit and loss account and is shown in liability side of balance sheet.

ADJUSTMENT: 3D

Extracted Trial Balance

Particulars	Debit	Credit
Provision for tax		76,000

Additional information:

Provision for taxation for the current year Rs 65,000

SOLUTION:

Journal Entries

Date	Particulars		LF	Amount	Amount
	Profit and loss account	Dr		60,000
	To Provision for tax account				6,000
	(Being- tax payable for the current year)

 

Profit and Loss Account

Particulars	Amount	Particulars	Amount
To Provision for tax (current year)	65,000

 

Profit and Loss Appropriation (Retained Earning) Account

Particulars	Amount	Particulars	Amount
	65,000	By Provision for tax (last year)	76,000

 

Balance Sheet

Liabilities	Amount	Assets	Amount
Provisions:
Provision for tax (current year)	65,000

 

Tax deducted at source, TDS

In business various types of expenses needs to pay.

Such as wage to employees, meeting allowance to board members, rent to house owner etc.

At the payment of such expense company needs to deduct TDS.

Later, TDS should be deposited into bank account of tax office department.

If TDS amount is given in trial balance it is shown in liability side of balance sheet.

 

ADJUSTMENT: 3E

Gross amount of rent of Rs 60,000 paid to house owner after deducting 10% tax deducted at source. Later TDS amount is deposited into concerned bank account of tax office.

Required:   (a) Journal entries; (b) Show in balance sheet if TDS is given in trial balance

SOLUTION:

Journal Entries

Date	Particulars		LF	Amount	Amount
a.	Rent account	Dr		60,000
	To Tax deduction at source (TDS) account				6,000
	To Bank account				54,000
	(Being- rent paid to house owner after deducting TDS)
b.	Tax deductions at source (TDS) account	Dr		6,000
	To Bank account				6,000
	(Being- TDS deposited to related bank of tax department)

 

(b) Show in balance sheet if TDS is given in trial balance

Trial Balance

Name of ledgers	Amount Dr	Amount Cr
Tax deduction at source (TDS) account		6,000

 

Balance Sheet

Liabilities	Amount	Assets	Amount
Current liabilities:
Tax deduction at source (TDS)	6,000

 

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