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Financial Reporting · Taxation

Current Tax Accounting and Prior Year Adjustments

Updated 11 October 2026 · Fact-checked

Current tax is the income tax payable on the taxable profit of the period, accounted for under IAS 12. You estimate the tax, debit tax expense and credit tax payable. Any difference between last year's estimate and the final bill (under- or over-provision) is added to or deducted from this year's charge.

Understand Current Tax and Tax Adjustments

Current tax is the amount of income tax a company expects to pay or recover on its taxable profit for the period. IAS 12 Income Taxes requires you to recognise it as a liability (to the extent unpaid) and as an expense in profit or loss.

At the year end, the company does not yet know its exact tax bill. So it makes an estimate. The double entry is: Dr Income tax expense (profit or loss), Cr Current tax payable (statement of financial position). The estimate is usually given in the question.

Estimates are rarely exactly right. When the tax authority agrees the final bill in the next year, there is a difference. If the estimate was too low, you have an under-provision. If it was too high, you have an over-provision. IAS 12 treats this as a change in estimate. You do not restate last year. You put the difference through this year's tax expense.

So the tax expense in profit or loss has two parts: this year's estimate, plus any under-provision (or minus any over-provision). The liability in the statement of financial position shows only the current year's estimate, because the prior-year balance is cleared when you settle it.

If tax relates to an item recognised in other comprehensive income (for example a revaluation gain), the tax on that item is shown in OCI, not in profit or loss. Deferred tax is a separate topic.

Key rules to remember

Tax expense in profit or loss
Current year estimate + under-provision − over-provision (+ deferred tax movement, if any)
Deferred tax is covered separately. Add it only if the question gives it.
Initial year-end entry
Dr Income tax expense; Cr Current tax payable (with the estimate)
The credit is the liability in current liabilities.
Under-provision
Under-provision = final tax bill − prior year estimate (final bill higher)
Increases this year's tax expense.
Over-provision
Over-provision = prior year estimate − final tax bill (final bill lower)
Reduces this year's tax expense.
Closing current tax liability
Opening liability − tax paid + current year estimate + under-provision − over-provision
This is the T-account balance. It equals the current year estimate if the prior year was settled in full.

How to solve Current Tax and Tax Adjustments questions

Use a tax payable T-account. It works for any question on current tax.

  1. 1Read the question and note: the opening tax liability (or prior year estimate), tax paid during the year, and the current year estimate.
  2. 2Set up a current tax payable T-account with the opening balance on the credit side.
  3. 3Enter the cash paid on the debit side. If the payment settles last year's liability, any difference to the opening balance is the under- or over-provision.
  4. 4Work out the under- or over-provision: opening liability minus cash paid in settlement. A positive remaining amount is an over-provision. A shortfall is an under-provision.
  5. 5Enter the current year estimate on the credit side. The closing balance is the liability for the statement of financial position.
  6. 6Calculate the profit or loss charge: current year estimate plus under-provision (or less over-provision).
  7. 7Write the figures into the statement of profit or loss and the statement of financial position. State which line each figure goes on.

Quickest way: Three-number shortcut

When to use it: Use this when the question gives an opening liability, a settlement payment and a new estimate, and you only need the charge and closing liability.

  1. Closing liability = the current year estimate (when last year's tax is fully settled by the payment).
  2. Prior year difference = opening liability − payment. Positive means over-provision (deduct). Negative means under-provision (add).
  3. Tax charge = current year estimate ± prior year difference.
  4. Quick check: charge − closing liability should equal the under-provision (or minus the over-provision).

Common mistakes in Current Tax and Tax Adjustments

  • Putting the under- or over-provision in the statement of financial position liability.

    Students think the liability must include every tax amount mentioned.

    Fix: The prior year difference only affects the profit or loss charge. The liability is the current year estimate once last year is settled.

  • Adding an over-provision to the charge instead of deducting it.

    The sign is confused because the word 'provision' sounds like an addition.

    Fix: Over-provision means you charged too much last year. It is a credit that reduces this year's expense. Under-provision increases it.

  • Restating last year's financial statements for the difference.

    Students treat it like an error correction.

    Fix: It is a change in accounting estimate under IAS 8 and IAS 12. Recognise it in the current period.

  • Treating the tax paid in cash as the expense.

    Mixing up cash with the accrual charge.

    Fix: Payment reduces the liability. The expense comes from the estimate and prior year adjustment.

  • Deducting tax from profit before tax to get taxable profit.

    Students confuse accounting profit with taxable profit.

    Fix: Use the estimate given. If asked to compute tax, apply the rate to the taxable profit stated in the question, not to profit before tax unless told to.

  • Showing income tax on a revaluation gain in profit or loss.

    Students put all tax on one line.

    Fix: Tax relating to items in OCI is shown in OCI, usually as a deduction from the gain.

Worked examples

Example 1

At 1 January 20X1 Delta Co had a current tax liability of ₹4,00,000. During 20X1 it paid ₹4,30,000 in final settlement of the 20X0 tax. The estimate of tax on 20X1 profits is ₹5,20,000. Calculate the tax charge in profit or loss for 20X1 and the closing liability.

Show the solution
  1. Prior year: opening liability ₹4,00,000. Paid ₹4,30,000. Shortfall = ₹30,000, so there is an under-provision of ₹30,000.
  2. T-account: Opening credit ₹4,00,000. Debit cash ₹4,30,000 would leave a debit balance of ₹30,000. Debit the shortfall to the tax expense (Dr Tax expense ₹30,000, Cr Tax payable ₹30,000) to clear the account to nil.
  3. Current year estimate: Dr Tax expense ₹5,20,000, Cr Tax payable ₹5,20,000.
  4. Closing liability = ₹5,20,000.
  5. Tax charge = ₹5,20,000 + ₹30,000 = ₹5,50,000.

Answer: Profit or loss tax expense is ₹5,50,000. Current tax payable in the statement of financial position is ₹5,20,000.

Example 2

Omega Co has a current tax liability of ₹7,50,000 brought forward at 1 April 20X2. It paid ₹7,10,000 in January 20X3 as the final settlement for the prior year. The tax estimate for the year ended 31 March 20X3 is ₹9,00,000. Show the tax payable T-account, the profit or loss charge and the closing liability.

Show the solution
  1. Prior year: ₹7,50,000 − ₹7,10,000 = ₹40,000. The estimate was too high, so there is an over-provision of ₹40,000.
  2. T-account credit side: Opening balance ₹7,50,000. Current year estimate ₹9,00,000.
  3. T-account debit side: Cash paid ₹7,10,000. Transfer of over-provision to profit or loss ₹40,000. Closing balance c/d ₹9,00,000.
  4. Check: debits ₹7,10,000 + ₹40,000 + ₹9,00,000 = ₹16,50,000. Credits ₹7,50,000 + ₹9,00,000 = ₹16,50,000. It balances.
  5. Tax charge = ₹9,00,000 − ₹40,000 = ₹8,60,000.

Answer: Profit or loss tax expense is ₹8,60,000. Current tax payable at 31 March 20X3 is ₹9,00,000.

Exam tips

  • In Section C, show the T-account or a short working. Marks go to the under- or over-provision and the final charge even if one figure is wrong.
  • In objective questions, read whether the answer asked for is the profit or loss charge or the liability. They are usually different numbers.
  • Check the sign of the prior year difference twice. Final bill higher means add. Final bill lower means deduct.
  • Label statement lines exactly: 'Income tax expense' in profit or loss and 'Current tax payable' in current liabilities.
  • If the question mentions tax on a revaluation, split it out. That tax goes to OCI, not profit or loss.

Practice questions from Taxation

Current Tax and Tax Adjustments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Current Tax and Tax Adjustments: frequently asked questions

What is the journal entry for current tax at the year end?

Debit income tax expense in profit or loss and credit current tax payable in the statement of financial position, using the estimate. This recognises both the cost and the amount owed.

What is the difference between under-provision and over-provision of tax?

An under-provision means last year's estimate was lower than the final bill, so you charge the extra to this year's expense. An over-provision means the estimate was higher than the final bill, so you reduce this year's expense.

Do I restate the prior year for a tax under-provision?

No. The difference is a change in estimate. You recognise it in the current year's tax expense and do not restate comparatives.

Where does current tax appear in the financial statements?

The expense appears in profit or loss, with tax on OCI items shown in OCI. The unpaid amount appears as a current liability in the statement of financial position.