ACCOUNTING FOR INCOME TAX

ACCOUNTING INCOME TAXABLE INCOME

income before tax tax returns (BIR)
pre-tax texcess of taxable revenue over expense
accrual principle cash basis accounting
Sales 1. Deductible - Asset
(Cost of Sales) 2. Taxable - Liability
Gross Profit
(Operating Expenses)
Income Before Tax

PERMANENT DIFFERENCES TEMPORARY DIFFERENCES

can never become temporary differences
difference between CAA or CAL & TB
1. Interest Income on Deposits includes TIMING DIFFERENCES
2. Dividends received * items of income and expenses which
3. Life insurrance premium are included in BOTH accounting income
4. Tax penalties, surcharges & fines and taxable income BUT AT DIFFERENT
TIME PERIODS*

KINDS OF TEMPORARY DIFFERENCES

TAXABLE TEMPORARY DIFFERENCESDEDUCTIBLE TEMPORARY DIFFERENCES
future TAXABLE AMOUNT future DEDUCTIBLE AMOUNT
DEFERRED TAX LIABILITY will decrease your income
eventually TREATED AS AN ASSET
DEFERRED TAX ASSET

1. AI > TI 1. AI < TI
2. CAA > TB 2. CAA < TB
3. CAL < TB 3. CAL > TB

JOURNAL ENTRIES : SEQUENCE

1. RECORD TAX LIABILITY

INCOME TAX EXPENSE (AI x 30%) XX

INCOME TAX LIABILITY XX

2. RECOGNIZED DEFERRED TAX LIABILITY

INCOME TAX EXPENSE XX

DEFERRED TAX LIABILITY XX

3. RECOGNIZED DEFERRED TAX ASSET

DEFERRED TAX ASSET XX

INCOME TAX BENEFIT XX
OPERATING LOSS CARRYFORWARDS
is an excess of tax reductions over gross income in a year that may be carried
forward to reduce taxable income in a future year.

NONDEDUCTIBLE ACCOUNTS NONTAXABLE ACCOUNTS

Donation Gain from setlement of the life
Charitable contributions in excess insurance
of the amount allowed
Premiums paid on the life insurance
Fines and Penalties

COMPUTATION OF REVALUATION SURPLUS:

Revaluation Surplus -beg. XX

Deferred Tax Liability (XX)
Adjusted Balance XX
Realization for the year
(Adjusted bal./#yrs) (XX)
Revaluation Surplus - end XX

Revaluation Surplus XX
Retained Earnings XX

COMPUTATION OF DEFERRED TAX EXPENSE:

Increase in DTL XX
Increase in DTA (XX)
DEFERRED TAX EXPENSE XX

POSSIBLE QUESTIONS:

PRETAX/AI
TOTAL INCOME TAX EXPENSE (AI x 30%)
CURRENT TAX EXPENSE/
CURRENT PROVISION/ (TI x30%)
CURRENT TAX LIABILITY/
DEFERRED TAX ASSET FUTURE DEDUCTIBLE AMOUNT
DEFERRED TAX LIABILITY FUTURE TAXABLE AMOUNT
TAX BASE
DEFERRED TAX BALANCE -asset/liability
diff. DTL & DTA x 30%
COMPUTATION OF TAXABLE INCOME:

ACCOUNTING INCOME XX
PERMANENT DIFFERENCES:
Nondeductible expenses:
Charitable contributions in excess
of the amount allowed XX
Premiums paid on the life insurance XX
Fines and Penalties XX XX
Nontaxable revenue:
Gain from setlement of the life
insurance XX
ACCOUNTING INCOME subj. for TAX XX
DEDUCTIBLE DIFFERENCES: (DTA/FTA)
Doubtful Accounts xx DEFERRED TAX ASSET XX
Estimated Warranty Cost xx INCOME TAX BENEFIT XX
TAXABLE TEMPORARY DIFFERENCES: (DTL/FDA)
Rent collected in advance (xx) INCOME TAX EXPENSE XX
Warranty Provision (xx) DEFERRED TAX LIABILITYXX
Excess tax depreciation
(Accounting Dep. - Tax Dep.) (XX)
Gross Income on installment sale (XX)
Deferred Income on installment sale (XX)
TAXABLE INCOME XX

CURRENT PROVISION:
CURRENT TAX EXPENSE = TAXABLE INCOME x 30%

COMPUTATION OF TOTAL INCOME TAX EXPENSE:

ACCOUNTING INCOME XX
PERMANENT DIFFERENCES:
Nondeductible expenses:
Charitable contributions in excess
of the amount allowed XX
Premiums paid on the life insurance XX
Fines and Penalties XX XX
Nontaxable revenue:
Gain from setlement of the life
insurance XX
ACCOUNTING INCOME subj. for TAX XX

TOTAL INCOME TAX EXPENSE = AI subj for tax x 30%

COMPUTATION OF INCOME TAX EXPENSE:

CURRENT (AI x 30%) XX

DEFERRED TAX LIABILITY
(AI - TI x 30%) XX
DECREASE ON DTL (XX)
INCOME TAX EXPENSE XX

PRESENTATION OF INCOME STATEMENT:

Income before TAX XX

Income Tax Expense:
CURRENT (AI x 30%) XX
DEFERRED TAX LIABILITY
(AI - TI x 30%) XX
DECREASE ON DTL (XX) XX
NET INCOME AFTER TAX XX

COMPUTATION OF NET DEFERRED TAX EXPENSE OR BENEFIT:

Tax benefit - DTA XX

Tax expense - DTL XX
NET DEFERRED TAX BENEFIT/ EXPENSE XX

REVERSAL OF TEMPORARY DIFFERENCES/PERMANENT DIFFERENCES

Deferred Tax Liability (FTA)

Excess of book basis of PPE over its tax baseXX
Deferred Tax Assets (FDA)
Excess of taz base over carrying amounts of
asset:
Net Receivables XX
Inventory XX
Exvess of carrying amounts of liabilities
over tax basis XX
TOTAL FUTUE DEDUCTIBLE AMOUNTS (DTA) XX
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