SUPPLEMENATRY LECTURE NOTES TAXEFFECT
SUPPLEMENTARY LECTURE NOTES: FINANCIAL ACCOUNTABILITY AND REPORTING
TAX EFFECT ACCOUNTING – BASIC STRUCTURE (STEP BY STEP APPROACH)
STEP 1
Calculate taxable profit from accounting profit
This will involve identifying all temporary and permanent differences between accounting income versus assessable income and accounting expenses versus tax expenses (tax deductions)
Accounting Profit
Add back accounting expenses
Subtract accounting revenues
(both temporary and permanent differences)
Then
Subtract tax expenses / deductions
Add back tax assessable income
(both temporary and permanent differences)
To arrive at taxable profit or taxable income (1)
STEP 2
Pass the basic preliminary entry recording tax payable.
Tax payable = Taxable income (1 above) * 30% = tax payable
Dr Tax Expense (current) (2) Cr Tax payable (current) (3)
This entry correctly records the tax payable (3 – above) due to the tax department based on tax concepts. AASB 112 – requires under tax effect accounting balance sheet approach to calculate tax expense ( 2 – above) on accounting concepts and therefore requires further adjustment
STEP 3
Adjustments to tax expense above so it reflects accounting concepts via a recognition of temporary differences and the associated deferred tax asset or deferred tax liability
Balance Sheets
Assets C.A versus T.B = T. Difference * 30% = DTA OR DTL
Eg. Accelerated x > y = z * 30% = DTL
Depreciation for
Tax purposes
Eg. Doubtful x < y = z * 30% = DTA
Debts provided not written off
y: tax base for assets = ca + future deductible amounts (tax purposes) – future assessable amounts (tax purposes)
Liabilities
Liabilities C.A versus T.B = T. Difference * 30% = DTA OR DTL
Eg. Provision for x > y = z * 30% = DTA
LSL accrued not paid Eg. Not typical x < y = z * 30% = DTL y: tax base for liabilities = ca - future deductible amounts (tax purposes) + future assessable amounts (tax purposes)
Except – Revenue received in advance
TAX EFFECT ACCOUNTING – BASIC STRUCTURE (STEP BY STEP APPROACH)
STEP 1
Calculate taxable profit from accounting profit
This will involve identifying all temporary and permanent differences between accounting income versus assessable income and accounting expenses versus tax expenses (tax deductions)
Accounting Profit
Add back accounting expenses
Subtract accounting revenues
(both temporary and permanent differences)
Then
Subtract tax expenses / deductions
Add back tax assessable income
(both temporary and permanent differences)
To arrive at taxable profit or taxable income (1)
STEP 2
Pass the basic preliminary entry recording tax payable.
Tax payable = Taxable income (1 above) * 30% = tax payable
Dr Tax Expense (current) (2) Cr Tax payable (current) (3)
This entry correctly records the tax payable (3 – above) due to the tax department based on tax concepts. AASB 112 – requires under tax effect accounting balance sheet approach to calculate tax expense ( 2 – above) on accounting concepts and therefore requires further adjustment
STEP 3
Adjustments to tax expense above so it reflects accounting concepts via a recognition of temporary differences and the associated deferred tax asset or deferred tax liability
Balance Sheets
Assets C.A versus T.B = T. Difference * 30% = DTA OR DTL
Eg. Accelerated x > y = z * 30% = DTL
Depreciation for
Tax purposes
Eg. Doubtful x < y = z * 30% = DTA
Debts provided not written off
y: tax base for assets = ca + future deductible amounts (tax purposes) – future assessable amounts (tax purposes)
Liabilities
Liabilities C.A versus T.B = T. Difference * 30% = DTA OR DTL
Eg. Provision for x > y = z * 30% = DTA
LSL accrued not paid Eg. Not typical x < y = z * 30% = DTL y: tax base for liabilities = ca - future deductible amounts (tax purposes) + future assessable amounts (tax purposes)
Except – Revenue received in advance