16.5 Income Tax
  ●Companies are charged income tax on their profit
  ●Accounting for income tax is initially based on estimates, since a company’s tax bill is not finalized and paid until nine months after its year end.
  ●Normally under or over provide for tax in any given year.
  Tax:
  A charge to profit – I.S.
  - Current year estimated tax + previous year’s under provision
  - Current yearestimated tax – previous year’s over provision
  A year end liability – SFP being the current year’s estimated tax.
  Example:
  Garry commenced trade on 1 January 2004 and estimates that the income tax payable for the year ended 31 December 2004 is $150,000. In September 2005, the accountant of Garry receives and pays a tax demand for $163,000 for the year ended 31 December 2004. At 31 December 2005, he estimates that the company owes $165,000 for income tax in relation to the year ended 31 December 2005.
  Draw up the tax charge and income tax payable accounts for the years ended 31 December 2004 and 2005 and detail the amounts shown in the Statement of financial position and income statement in both years.
  Tax charge – Income statement
  2004 Tax Expense: 150,000
  2005 Tax Expense: 178,000
  Statement of financial position:
  2004    2005
  Income tax liability    150     165
  Income tax expense    150     178