What are the two differences between accounting income and taxable income? Explain each.

Accounting income is different from taxable income since the accounting income is the net
profit before tax for a period while taxable income is the income where income tax payable is computed
by applying provisions of income tax. They were also different since the rulings of accounting are
different from taxation. Aside from that, the accounting income appears on the traditional income
statement and is computed using accounting standards while taxable income is computed with the use
of income tax law. Moreover, the difference between them was separated into two: Permanent
difference and Temporary difference.

The permanent differences are those items of the revenue and expense which are included in
either accounting income or taxable income but will never be included in the other. It has no future tax
consequences. It also pertains to the nontaxable revenue and nondeductible expenses. There will be a
permanent difference if the revenues/expenses are included in the first year in accounting then it will
never be included in the taxation’s first year and so on or the other way around. There we can see the
permanent difference between the two because it will never be included in the other.

The temporary difference, on the other hand, includes a timing difference. Timing differences
are the difference between accounting income and taxable income which are the items of income and
expenses that are included in both but at different periods. The temporary difference five rises to either
deferred tax liability and deferred tax asset.

What approach is required by PAS 12 in accounting for income tax? Explain why such an
approach is required.

The approach that is required by PAS 12 in accounting for income tax is the statement of
Financial position approach. This approach is required since it includes all temporary differences, which
also includes timing differences. It affects the statement of financial position. Compared to the Income
statement approach and statement of financial position approach, the income statement approach only
focuses on timing differences in the computation of deferred tax assets or deferred tax liability.