New SIDBI Grade A New Batch Starts on Nov 18

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    Question

    In the realm of corporate accounting and finance, companies often need to allocate funds for various purposes ahead of time. One such allocation involves the advance payment of taxes before they are due, which helps in managing cash flow and complying with tax regulations. This type of payment is categorized in a specific manner within the company's financial statements. Identify the correct classification for advance payment of tax from the options given below:

    A Prepaid Expense Correct Answer Incorrect Answer
    B Tax Expense Correct Answer Incorrect Answer
    C Income Tax Paid Correct Answer Incorrect Answer
    D Provision for Taxation Correct Answer Incorrect Answer
    E Deferred Tax Liability Correct Answer Incorrect Answer

    Solution

    Advance payment of tax is classified as a prepaid expense. This is because it represents an expense that has been paid in advance and will benefit the company in future periods when the tax is due. Prepaid expenses are recorded as current assets on the balance sheet until the benefit is realized, at which point they are expensed on the income statement.

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