Treatment of Provision for Taxation and Proposed Dividends

Read this article to learn about the two treatments of provision for taxation and proposed dividends.

Provision for Taxation:

There are two possible treatments about the provision for taxation:

1. Provision for taxation can be treated as a current liability and it will decrease the working capital in the schedule of changes in working capital. However, payment of tax does not affect working capital because it involves both current asset and current liability account, i.e., payment decreases cash or bank balance on the one hand and decreases the current liability (tax provision) by the equivalent amount on the other hand.

2. Provision for taxation may be considered as non-current item. Such a treatment does not change working capital position. Provisions made for taxation during the current year is transferred to adjusted profit and loss account. The amount paid as tax is shown as an application of fund.

Proposed Dividends:

There are also two treatments about the proposed dividend:

1. Proposed dividends can be considered as current liability and hence will decrease working capital in the schedule of changes in working capital. However, when dividends are paid, it is not treated as uses of funds.

2. Proposed dividend can be treated as non-current item. In this case, proposed dividend for current year is added back to retained profit in order to find out funds from operations. Then, payment of dividend will be shown as application of funds. Generally, it is treated as non- current item.

Illustration 1:

Following are the summarized Balance Sheet of A. Co. Ltd. as on 31st December, 2012 and 2013:

Illustration 4: Balance Sheet

Additional information supplied:

During the year ended 31st December, 2013:

(a) Dividend of Rs. 23,000 was paid.

(b) Assets of another company were purchased for a consideration of Rs. 50,000 payable in shares.

The following assets were purchased: Stock Rs. 20,000: Machinery Rs. 25,000.

(c) Machinery was purchased for Rs. 8,000.

(d) Depreciation written off: Building Rs. 10,000, Machinery Rs. 14,000.

(e) Income-tax paid during the year Rs. 28,000. Provision of Rs. 33,000 was charged to Profit and Loss A/c.

Prepare a Statement of Sources and Applications of funds for the year ended 31st December, 2013.

Illustration 4: Statement of Sources and Applications of funds

Illustration 4: Statement of changes in working capital, Adjusted Profit and Loss A/c, Share Capital A/c, Machinery A/c, Provision for Income-tax

Illustration 2:

From the following Balance Sheets of A Ltd. make out the statement of sources and uses of funds:

Illustration 5: Balance Sheet

Additional information:

(i) Depreciation of Rs. 10,000 and Rs. 20,000 have been charged on plant account and land and buildings account respectively in 2013.

(ii) An interim dividend of Rs. 20,000 has been paid in 2013.

(iii) Income-tax Rs. 35,000 was paid during the year 2013.

Illustration 5: Statement of Sources and Applications of Funds and Schedule of Changes in Working Capital  

Illustration 5: Adjusted Profit and Loss A/c, Goodwill, Land and Building, Plant A/c, General Reserve, Proposed Dividend

Illustration 5: Provision for Taxation

Submitted by : Dr. Jackson, Category : Taxation