Appropriation of profits towards provision for Taxes and Dividends

Where Provision for Taxes/Dividends accounts are Non-Current Liabilities

Where provision for taxation and provision for dividends accounts are non-current accounts, the transaction for creating the reserve would not be a cross transaction and as such would not result in a change in working capital.

Creation of Reserve for Taxation	Dr. Profit and Loss Appropriation a/c Cr. Provision for Taxation a/c	Non-Current Non-Current
Creation of Reserve for Dividends	Dr. Profit and Loss Appropriation a/c Cr. Provision for Dividends a/c	Non-Current Non-Current

Where Provision for Taxes/Dividends accounts are Current Liabilities

Where provision for taxation and provision for dividends accounts are current accounts, the transaction for creating the reserve would be a cross transaction and as such would bring about a change in working capital.

Creation of Reserve for Taxation	Dr. Profit and Loss a/c Cr. Provision for Taxation a/c	Non-Current Current
Creation of Reserve for Dividends	Dr. Profit and Loss a/c Cr. Provision for Dividends a/c	Non-Current Current

Since the debit is made to the profit and loss account, it represents a transaction that results in a charge to the profit and loss account. The affect of all such transactions on the working capital is considered in a consolidated manner under the head funds from operations.

Moreover, because these accounts are current accounts, they would not be considered for the purpose of analysing funds flow They will be taken into consideration only for the purpose of preparing the statement of changes in working capital.

Note

Using Profit/Loss account in place of Profit/Loss Appropriation account for non-cross transactions would be helpful in finding the funds from operations easily.

Are they Current or Non-Current

Where there is no specific indication as to whether the accounts like provision for taxation/dividends accounts are current natured or non-current natured, we are required to make an assumption and decide for ourselves.

When there is no indication we may choose either of the options. However, it is a convention that if we find the accounts grouped together with current accounts we treat them as current natured and if they are grouped together with non-current natured accounts we treat them as non-current accounts.

Where it is not possible to decide based on their presence in the Balance Sheet (in cases where the balance sheet items are not arranged in an order or where the Balance Sheet is not known/given), then we can make our own assumptions, in the absence of any other indication regarding the same. In such cases, because these are capable of being treated either ways, it would always be appropriate to indicate our assumption.

All need not be of the same kind

Where there are two or more such accounts and we are required to decide upon their nature, it is not a requirement that all of them should be considered to be of the same kind. One or more of them can be assumed to be current natured and the rest to be non-current natured accounts.

n~13 t~5 «Note~13_Topic~6 » n~13 t~7