ACCOUNTING FOR INCOME TAXATION

AT THE END OF THIS LESSON YOU WILL BE ABLE

 To know the distinction between accounting income and taxable income.

 To distinguish permanent differences and temporary differences between accounting

income and taxable income.

 To know the recognition and measurement of deferred tax asset and deferred tax liability.

 To know the recognition and measurement of current tax asset and current tax liability.

 To distinguish interperiod tax allocation and interperiod tax allocation.

INTRODUCTION

 Deferred tax accounting is application to all entities whether public or nonpublic

entities.
 Accounting income is the net income for the period before deducting income tax
expense.
 Taxable income is the income for the period determined in accordance with the rules
established by the taxation authorities upon which income taxes are payable or
recoverable.
 DIFFERENCES BETWEEN ACCOUNTING AND TAXABLE INCOME

 Permanent differences – items of revenue and expense which are included in ether accounting
income or taxable income but will never be included in the other.
Examples:
 Interest income on deposits
 Dividends received
 Life insurance premium
 Tax penalties, surcharges and fines
 Temporary differences – differences between the carrying amount of an asset or liability and the
tax base.
 Taxable temporary difference
 Deductible temporary difference
TAX BASE

 Tax base of an asset – amount that will be deductible for tax purposes against future income.

Example: If an entity has appropriately capitalized P1,000,000 as software development cost, the
carrying amount is P1,000,000 for accounting purposes.

 Tax base of a liability – normally the carrying amount less the amount that will be deductible for

tax purposes in the future.

Example: If an entity has recognized an estimated warranty liability of P500,000, the carrying
amount is P500,000 for accounting purposes.
 DEFERRED TAX LIABILITY

A deferred tax liability arises from the following:

a) Accounting Income > than Taxable income
b) Carrying amount of an asset > Tax base of an asset
c) Carrying amount of liability < Tax base of a liability
Recognition of a deferred tax liability
 Shall be recognized for all taxable temporary difference except the following:
a) Goodwill resulting from a business combination and which is nondeductible for tax purposes.
b) Initial recognition of an asset or liability in a non-business combination transaction and affects
neither accounting income nor taxable income.
c) Undistributed profit of subsidiary, associate or joint venture when the parent, investor or venturer
is able to control reversal’s timing of the temporary difference.
DEFERRED TAX ASSET

A deferred tax asset arises from the following:

a) Accounting income < Taxable income

b) CA of an asset < Tax base of an asset

c) CA of liability > Tax base liability

Recognition of deferred tax asset

 shall be recognized for all deductible temporary differences and operating loss carryforward

when it is taxable when it is probable that taxable income will be available against which the
deferred tax asset can be used.
 ACCOUNTING PROCEDURES

1. Determine the taxable income 3. Determine the deductible temporary difference

Taxable income
x tax rate______
Current tax expense
Income tax expense xx
Income tax payable xx
2. Determine the taxable temporary difference
Taxable temporary differences
x tax rate______
Deferred tax liability
Income tax expense xx
Deferred tax liability xx
Deductible temporary differences
x Tax rate_________
Deferred tax asset
Deferred tax asset xx
Income tax benefit xx
4. Determine the total tax expense.
Current tax expense
+ Deferred tax expense from taxable temp. differences
– Income tax benefit from deductible temp differences
 Net deferred tax expense or benefit – difference between the change in deferred tax
asset and the change in deferred tax liability.
 Current tax liability – the amount of income tax actually payable.
 Current tax asset – prepaid income tax and shall be classified as a current tax asset.
 Intraperiod tax allocation – allocation of income tax expense to the various
revenues that brought about the tax.
 Interperiod tax allocation – recognition of a deferred tax asset or liability.
Deferred Tax Asset
 Classified as noncurrent asset
 Shall be measured using taxrate
 Shall not be offset unless required or
permitted by the standard.
Deferred Tax Liability
 Classified as noncurrent liability
 Shall be measured using tax rate
 Shall not be offset unless required or
permitted by the standard.
Illustration:
On December 31, 2020, the accounts of Easy Company have the same basis for accounting and tax purposes,
except:
Carrying amount Tax base Difference
Computer software cost 4,000,000 0 4,000,000
Building 47,500,000 45,000,000 2,500,000

In January 2020, Easy Company incurred cost of P5,000,000 for the development of a computer software
product.
Considering the technical feasibility of the product, this cost was capitalized and amortized over 5 years for
accounting purposes using the straight line method.

Computer software cost 5,000,000

Amortization for 2020 (5,000,000/5) (1,000,000)
Carrying amount – December 31, 2020 4,000,000
The building was acquired on January 1, 2020 for P50,000,000 and depreciated using the straight line at 5%
for accounting purposes and 10% for tax purposes.

Building 50,000,000
Accumulated Depreciation (50,000,000 x 5%) (2,500,000)
Carrying amount – December 31, 2020 47,500,000

Building 50,000,000
Accumulated Depreciation (50,000,000 x 10%) (5,000,000)
Tax base– December 31, 2020 45,000,000

Computer software cost 4,000,000

Building (47,500,000 – 45,000,000 (2,500,000)
Total taxable temporary differences 6,500,000

Deferred tax liability – December 31, 2020 (30% x 6,500,000) 1,950,000

Journal entries:
Income tax expense 1,950,000
Deferred tax liability 1,950,000
Income tax expense 1,050,000
Income tax payable 1,050,000

Income statement presentation for 2020

Income before tax 10,000,000

Income tax expense:
Current tax expense 1,050,000
Deferred tax expense 1,950,000 3,000,000
Net income 7,000,000