Table of Contents
Provisions for taxation and proposed dividends are typically classified as non-current liabilities in a company’s balance sheet. Non-current liabilities are obligations that a company is expected to settle more than one year from the reporting date.
The treatment of provisions for taxation and proposed dividends as non-current liabilities in the balance sheet is as follows:
- Provisions for taxation: These are amounts set aside by a company to cover its future tax liabilities. They are recognized as a non-current liability if they are not expected to be settled within the next 12 months. The provision for taxation is typically calculated based on the estimated amount of tax payable in the future.
- Proposed dividends: These are dividends that a company has declared but has not yet paid to its shareholders. They are recognized as a non-current liability if they are not expected to be paid within the next 12 months. The proposed dividends are typically disclosed in the notes to the financial statements and are subject to approval by the shareholders.
It’s important to note that provisions for taxation and proposed dividends are both subject to change based on the company’s performance and management decisions. As a result, they may be adjusted in subsequent periods as new information becomes available.
In summary, provisions for taxation and proposed dividends are reported as non-current liabilities in the balance sheet because they are expected to be settled beyond the next 12 months.
Provision for Taxation
There are two ways of dealing with the provision of taxation:
-
As a current liability
-
As an appropriation of profits
(Appropriation of profits refers to the process of allocating a company’s profits to various uses, such as paying dividends to shareholders, retaining earnings for future growth, or making other distributions or transfers of funds. This process typically takes place after a company has prepared its financial statements and determined the amount of profit it has earned in a given period.)
Illustration 1: The opening balance in the Provision for Taxation Account as of 1st January 2002 was Rs.30,000 and the closing balance on 31st December 2002 was Rs.40,000. the taxes paid during the year amounted to Rs.25,000. How will you deal with this item in the fund’s flow statement?
A) When Provision for taxation is treated as a current liability.
| Schedule of Changes in Working Capital | ||||
| 1-1-2020 | 31-12-2020 | Increase in working capital | Decrease in working capital | |
| Current Liabilities | ||||
| Provision For taxation | 30,000 | 40,000 | 10,000 | |
B) When Provision for taxation is treated as an appropriation of profits:
| Funds Flow Statement | ||||
| for the year ended 31-12-2020 | ||||
| Sources | Rs. | Application | Rs. | |
| Payment of Tax | 25,000 | |||
Proposed Dividends
There are two ways of dealing with the provision of taxation:
-
As a current liability
-
As an appropriation of profits
Illustration 2: Extracts from the Balance sheet:
| 31-3-2019 | 31-03-2020 | ||
| Proposed Dividend | 50,000 | 70,000 | |
| Profit and Loss A/c (Cr.) | 2,00,000 | 3,00,000 | |
A) When Provision for taxation is treated as a current liability.
| Proposed Dividend A/c | |||
| for the year ended 31-03-2020 | |||
| Particulars | Rs. | Particulars | Rs. |
| To Cash-Dividend Paid | 50,000 | By Balance b/d | 50,000 |
| To Balance c/d | 70,000 | By Adjusted P/L A/c (balancing Figure) | 70,000 |
| 1,20,000 | 1,20,000 | ||
B) When Provision for taxation is treated as an appropriation of profits:
| Adjusted P/L A/c | |||
| for the year ended 31-03-2020 | |||
| Particulars | Rs. | Particulars | Rs. |
| To Proposed Dividend Paid | 70,000 | By Balance b/d | 2,00,000 |
| To Balance c/d | 3,00,000 | By Adjusted P/L A/c (balancing Figure) | 1,70,000 |
| 3,70,000 | 3,70,000 | ||