22420 Chap.12 Accounting for Income Tax
Accounting for Income Tax
Two measures of profit
Accounting profit follows the standards and accrual accounting; taxable profit follows the tax authority’s rules, closer to cash.
AASB 112 makes income tax expense reflect the tax caused by the year’s transactions, not just the tax payable, so expense equals current tax plus deferred tax.
Current and deferred tax
A current tax worksheet adjusts accounting profit for permanent and temporary differences to reach taxable profit.
A deferred tax worksheet compares each asset and liability’s carrying amount with its tax base, classifies taxable and deductible temporary differences, and posts the movement in deferred tax balances.
Three accounting systems
The waypoint ends the semester by pointing out that you now know three ways of measuring the same activity: cash accounting, accrual financial accounting and tax accounting.
Income tax accounting is where the last two meet.
What this chapter covers
- 01
Accounting profit versus taxable profit
- 02
Tax caused versus tax paid
- 03
Permanent and temporary differences
- 04
The current tax worksheet
- 05
Carrying amount, tax base and the four steps
- 06
Taxable and deductible temporary differences
- 07
Deferred tax assets from tax losses
- 08
Reconciling total tax expense
Worked example · free
Working from accounting profit to current tax
- 1Add back entertainment $6,000, depreciation $50,000, leave expense $18,000 and rent received $30,000, for $504,000.
- 1Deduct tax depreciation $70,000, leave paid $12,000 and rent revenue $24,000, a total of $106,000.
- 1Taxable profit is $398,000 and current tax is $398,000 × 30% = $119,400.
- 1Entry: Dr Income tax expense (current) $119,400; Cr Current tax liability $119,400.
Key terms
- Taxable profit
- Profit for a period determined under the tax authority’s rules, on which income tax is payable.
- Tax base
- The amount attributed to an asset or liability for tax purposes, compared with its carrying amount.
- Temporary difference
- A difference between carrying amount and tax base that will reverse in later periods.
- Deferred tax liability
- Tax payable in future periods on taxable temporary differences.
- Deferred tax asset
- Tax recoverable in future periods from deductible temporary differences or carried-forward tax losses.
- Permanent difference
- An item that affects accounting or taxable profit but never reverses, such as non-deductible entertainment.
Accounting for Income Tax FAQ
Why is tax expense not just tax payable?
Because taxable profit and accounting profit recognise items in different periods. AASB 112 matches the expense to the tax caused by this year’s transactions, so it includes the deferred tax on differences that will reverse later.
How is a tax loss accounted for?
If the recognition criteria are met, the future deduction is a deferred tax asset, recorded with a credit to deferred tax expense; when the loss is used against later taxable profit, the asset is reversed.
Does an asset carried above its tax base create a deferred tax asset or liability?
A liability. The asset will generate taxable income when it is recovered, but its tax deductions have already been used up, so more tax is payable in later periods.
What are the four steps in calculating deferred tax?
Find each asset’s and liability’s carrying amount, find its tax base, classify the differences as taxable or deductible, then multiply the totals by the tax rate and post the movement from the opening deferred tax balances.
Does entertainment create deferred tax?
No. Non-deductible entertainment is a permanent difference: it is added back in the current tax worksheet and never reverses, so it has no future tax consequence and no deferred tax asset or liability is recognised for it.
Exam move
Rehearse the current tax worksheet with a fixed rule: add back accounting expenses and cash receipts that tax treats differently, then deduct revenues and tax deductions. Follow it with a deferred tax worksheet on the same facts and reconcile total expense two ways. Add one tax loss year and its recoupment so that the deferred tax asset entries are familiar.
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