Provision for taxation is the amount set aside out of current profits to meet the future demands of the taxman by way of corporation tax. From the fact that the liability for tax shown in the balance sheet is the same as the amount provided from current profits one deduces that there is no outstanding provision for future liability. Sophisticated students of accountancy will realise that this cannot be true, but this pretence makes it simpler to understand for the non-tax specialist.

A Processing Co. Ltd

Trading Account for the year to 31 December, 2016

£1 £1

Total sales for the year 580,000

Materials consumed

Commencing stock at 1 Jan 105,300

add Purchases for year 460,000


less Stock remaining 31 Dec 88,000

Thus cost of material used in sales 477,300

Wages paid 15,300

Other processing costs 10,400

Total processing costs of goods sold

Gross profit transferred to Profit and Loss Account Profit and Loss Account for the year to 31 December, 2016

Gross profit for year

Expenses: depreciation, staff salaries, heating, lighting, postage, telephone, carriage, administrative and selling costs, and directors' remuneration

Net profit before tax

Allocated as follows:

Provision for taxation

Provision for net dividend (no interim

dividend paid)

(b) Provision for dividend is the net amount of dividend recom-

mended for payment to shareholders, but not yet paid.

(c) Transfer to reserves is the amount left over from current

profits but being retained in the business. It represents the amount by which the net value of the shareholders' stake has increased over the year, in money terms.

How To Read A Company Balance Sheet

From the simple accounts of a small trader to the published accounts of public limited companies is quite a small step. The principles concerned are exactly the same, but what we have come to know as the income and expenditure account now takes the form of a profit and loss account. Moreover, this profit and loss account is usually divided into two parts - the first part, accommodating the proceeds of sales and the direct costs of producing the output, is called the trading account, the balancing item on which will be the gross profit; the second part, the profit and loss account proper, takes the... see: How To Read A Company Balance Sheet

Refunds, Personal And Business Finance 2017

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