INTERMEDIATE

ACCOUNTING 2
 ACCOUNTING FOR INCOME
TAXATION
• Difference of Taxable Income from
Accounting Income
• Incme tax payable vs. Income tax expense
• Temporary Difference
• Permanent Difference
• Tax Rate
 Difference of Taxable Income
from Accounting Income
Accounting
Basis Taxable Income
Income

Recognized
Recognized
revenue only
Revenues revenue when
when actually
earned
received
Recognized
expense for tax There is accrual
Expenses
deduction when of expenses
paid
 Accounting
Basis Taxable Income
Income

Depreciation as
Depreciation is
tax deduction is
allocated over
Property, Plant, based on the
the estimated
& Equipment schedule of
economic life of
depreciation
the asset
rates
Tax deduction
Recognize as an
when the
expense when
Doubtful Debts receivables are
identified as
written off as bad
doubtful
debts
Income tax Payable - the amount that must
be paid to the government. Calculated by
applying the income tax rate to Taxable
Income.

Income tax Expense - the amount shown

as an expense on the Income Statement
but not necessarily the same as Income
Tax Payable
 How to compute Income Tax
Payable
Financial Income
+/- Permanent Differences
Income Subject to tax
+/- Temporary Differences
TAXABLE INCOME
x Tax Rate
Current Income Tax Expense
 Permanent Differences
• No future Tax consequences

1. Non-taxable Revenue - Deducted from

Accounting Income. e.g
a. Interest income on deposits
b. Dividends received
c. Life Insurance Proceeds
2. Non-Deductible Expenses - Added back to
Accounting Income. e.g
a. Life Insurance premium
b. Tax penalties, surcharges and fines
 Temporary Differences
• Timing Differences
• Tax Base and Carrying Amount
Differences
• Other temporary Differences
• Unrecognizable Temporary Differences

These items gives rise to either Deferred

Tax Asset or Deferred Tax Liability.
Future Taxable Amount - AKA "Deferred Tax
Liability"
A future tax liability or asset,
resulting from temporary differences or timing
differences between the accounting value of
assets and liabilities and their value for tax
purposes.

Deferred Tax Liability - Taxes to be paid in the

future when future taxable amounts become
taxable (when the temporary differences
reverse)
Future Deductible Amount - AKA "Deferred Tax
Asset"
A temporary difference that will
decrease taxable income relative to accounting
income in the future as a result of
revenuesd/gains appearing on the tax return in
an earlier period than income statement or
expenses appearing on the tax return in a later
period than income statement.

Deferred Tax Asset = Taxes to be saved in the

future when future deductible amounts reduce
taxable income (when the temporary difference
reverses)
Deferred Tax Asset and Deferred Tax
Liability is computed by:

Temporary Difference x Current Tax

Rate
 Pro Forma Journal Entry
For Deferred Tax Asset:
Deferred Tax Asset xxx
Income Tax Expense xxx

For Deferred Tax Liability:

Income Tax Expense xxx
Deferred Tax Liability xxx
 Example of Timing
Differences
• Advance Payments for rent or deposits
• Litigation loss
• Impairment Loss
• Doubtful Accounts (Provision in AR)
• Installment Sale (cash basis taxation)
• Accelerated Depreciation
• Development Cost
• Prepaid Expenses
 Tax Base and Carrying Amount
Differences
• When Tax Base of Asset > Carrying
Amount - Ex. recognizing allowance for doubtful
accounts
• When Tax Base of Liability < Carrying
Amount - Ex. Unearned Revenue

Note: gives rise to DTA hence, added to

Income Subject to Tax
 Tax Base and Carrying
Amount Differences
• When Tax Base of Asset < Carrying
Amount - Ex. Prepaid Expenses
• When Tax Base of Liability > Carrying
Amount

Note: gives rise to DTL hence, deducted

from Income Subject to Tax
Other Temporary Differences
• Asset is revalued DOWNWARD
• Tax base of Investment is Higher than Carrying
Amount - Unrealized loss
• Operating Loss Carry-forward
• an EXCESS of tax deductions over gross income of the
year (resulting to negative taxable income) maybe carried
forward to reduce the taxable income of the future years

Note: Should be added to Income subject to

Tax
 Other Temporary Differences
• Asset is revalued UPWARD
• DTL is recognized on Revaluation Surplus
• Revaluation Surplus x Tx rate = DTL
• Tax base of Investment is lower than Carrying
Amount - Unrealized Gain
• Cost of business combination allocated to the
identifiable asset and liabilities at Fair Value

Note: Should be deducted from Income subject

to Tax
 Unrecognizable Temporary
Differences
(gives rise to DTL)
• Goodwill resulting from business
combination (goodwill at initial recognition)
• Initial recognition of asset and liability
• Undistributed profit
• the parent, investor or venture is able to control the
timing of the reversal of temporary differences
• it is probable that the temporary differences will not
be reversed in the future
Since DTA and DTL is computed based on
current Tax Rate:

If change in a tax law or rate occurs, any

existing tax liability or asset must be
adjusted to reflect the amount to be paid
or recovered in the future. When is the
effect of the adjustment shown in net
income?

The effect of the change is included in

Income Tax Expense in the year the
change occurs
THE END