ACCOUNTING FOR INCOME TAX

ACCOUNTING INCOME VS. TAXABLE INCOME

Accounting income or financial income is the net income for the period
before deducting income tax expense.
Taxable income is the income for the period determined in accordance with
the rules established by the taxation authorities upon which income taxes
are payable or recoverable
PERMANENT AND TEMPORARY DIFFERENCE
Permanent differences are items of revenue and expense which are
included in either accounting income or taxable income but will NEVER be
included in the other. (nontaxable revenue, nondeductible expenses).
1. Interest income on deposits
2. Dividends received
3. Life insurance premium (if entity is the beneficiary, nondeductible)
4. Tax penalties, surcharges and fines (nondeductible)
Temporary difference are items of income and expenses which are
included in both accounting income and taxable income but at different
time periods. It gives rise to either deferred tax asset or deferred tax
liability.
1. Taxable temporary difference (deferred tax liability)
2. Deductible temporary difference (deferred tax asset)
DEFERRED TAX LIABILITY
arises from:
1. When the accounting income is higher than taxable income because of
timing differences
2. When the carrying amount of an asset is higher than tax base
3. When the carrying amount of liability is lower than tax base
TAX BASE
the tax base of an asset or liability is the amount attributable to the asset
or liability for tax purposes.
ACCOUNTING INCOME HIGHER THAN TAXABLE INCOME (future taxable)
1. Revenues and gains are included in accounting income of the current
period but are taxable un future periods.
Example: Installement sale
2. Expenses and losses are deductible for tax purposes in the current
period but deductible for accounting purposes in future periods.
Example: Accelerated depreciation, development cost, prepaid expense
RECOGNITION OF DEFERRED TAX LIABILITY
A deferred tax liability is not recognized when the taxable temporary
difference arises from:
1. Goodwill arising from business combination
2. Initial recognition of an asset or liability
3. Undistributed profit of subsidiary, associate or joint venture
DEFERRED TAX ASSET
arises when:
1. when the taxable income is higher than accounting income
2. When the carrying amount of an asset is lower than tax base
3. When the carrying amount of liability is higher than tax base
TAXABLE INCOME HIGHER THAN ACCOUNTING INCOME (future
deductible)
1. Revenues and gains are included in taxable income of current period but
are included in accounting income of future periods.
Example: Rent received in advance
2. Expenses and losses are deducted from accounting income of current
period but are deductible for tax purposes in future periods.
Example: litigation loss, estimated product warranty cost, research cost,
impairment loss, doubtful accounts
OPERATING LOSS CARRYFORWARD
It is an excess of tax deductions over gross income in a year that may be
carried forward to reduce taxable income in a future year.
METHOD OF ACCOUNTING FOR INCOME TAX INCOME STATEMENT
APPROACH STATEMENT OF FINANCIAL POSITION APPROACH
COMPUTATION:
Accounting income per book
Permanent differences:
Add: Nondeductible expenses
Less: Nontaxable gain
Accounting income subject to tax
Deductible temporary differences:
Add: Doubtful accounts
Estimated warranty cost
Taxable temporary differences
Less: Excess tax depreciation
Gross income on installment sale
Taxable income
NET DEFERRED TAX EXPENSE OR BENEFIT (pg. 554) CURRENT TAX LIABILITY
AND CURRENT TAX ASSET PRESENTATION OF DEFERRED TAX ASSET OR
LIABILITY MEASUREMENT OF DEFERRED TAX ASSET OR LIABILITY
INTRAPERIOD AND INTERPERIOD TAX ALLOCATION DISCLOSURES
RELATED TO INCOME TAX