Explanation:

Provision for taxation may be treated in the following two ways:

(a) Treated as an appropriation profit:

Under this treatment, the amount of tax which should be provided out of profit, is to be debited to Profit and Loss Account, whereas the actual amount of tax which is to be paid is to be shown as an application in the ‘Statement of Sources and Applications of Funds’.

(b) Treated as a charge against profit:

Under the circumstances, provision for taxation is to be treated simply as a current liability, and, therefore, no adjustment is necessary either in Profit and Loss Account or in the ‘Statement of Sources and Applications of Funds’ as an application.