What is the effect of a provision for tax over/under provided in prior periods in the current profit and loss?

In financial accounting, when a provision for tax has been over or under provided in prior periods, it is essential to address this adjustment in the current period's financial statements. This adjustment is treated as a correction to the current tax expense.

When a tax provision is deemed to be an over-provision from previous periods, it means that the company had set aside more money than was necessary for tax liabilities. Recognizing this over-provision in the current period leads to a reduction in the current tax expense reported in the profit and loss statement, thereby adjusting expenses accurately. Conversely, if there was an under-provision, the company would need to account for the additional tax owed, increasing the current tax expense.

Therefore, classifying this adjustment as part of the current tax expense allows for a clearer and more precise reflection of the company's tax obligations in the financial statements. It ensures that the profit and loss accounts present an accurate picture of financial performance by including any necessary corrections in tax calculations from previous periods. This treatment helps maintain transparency and reliability in financial reporting.