This document provides an overview of accounting for income tax. It discusses calculating taxable profit and current tax expense, accounting for movements in deferred tax accounts, and changes in tax rates. It explains differences between accounting and tax treatments for transactions that can result in temporary or permanent differences. The document also specifies the disclosures required by accounting standards and provides examples of calculating current and deferred tax balances.

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Prepared by Miranda Dyason
Workshop 5:
Accounting for income tax
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Calculate taxable profit, and account for current taxation
expense;
Explain that some transactions have both current and future tax
consequences;
Account for movements in deferred taxation accounts, and
changes in tax rates; and
A
B
C

2. D
Learning Outcomes
1
E Specify the disclosures required by AASB 112.
Explain differences between accounting treatments and taxation
treatments for a
range of transactions;
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Accounting profit v Taxable profit
2
ACCOUNTING TAX
Basis of
accounting
Accruals basis
Principally cash basis (some
exceptions – eg. sales)
Equations Revenue – Expenses

3. = Accounting profit
Taxable income (TI) – tax
deductions (TD) = Taxable
profit
AASBs and the
Corporations Act are key
sources that determine
the appropriate
accounting treatment of
transactions
The Income Tax Assessment Act
determines the tax treatment of
transactions
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▸ Permanent differences:
• Arise when amounts recognised as part of accounting profit
are not

4. recognised as part of taxable profit (or vice versa).
▸ Temporary differences:
• Arise when the period in which revenues and expenses are
recognised for accounting purposes is different from the period
in
which such revenues and expenses are treated as taxable income
and allowable deductions for tax purposes.
Permanent & temporary differences
3
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Review questions:
4
Loftus et al (Chapter 12):
• Comprehension question 1:
What is the main principle of tax-effect accounting as
outlined in AASB 112?

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▸ The tax consequences of transactions that occur for
accounting purposes
during a period should be recognised as income or expense
during the
current period, regardless of when the tax effects will occur.
▸ This requires identifying the current and future tax
consequences of
items recognised in the statement of financial position.
▸ To determine current tax consequences of transactions, we
need to
determine the entity’s taxable profit for the year, and associated
income
tax payable.
▸ To determine future tax consequences of transactions, we
need to look
at the differences between an entity’s Statement of Financial
Position
(prepared in accordance with the accounting standards) and its
tax-
based Balance Sheet prepared in accordance with income tax
legislation.
The requirements of AASB 112
5

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Review Question –
Current and future tax consequences
6
Loftus et al (Chapter 12):
• Application and analysis exercise 12.6.
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Company A: DR CR
Interest revenue
(passive)
100
Cash
101
Share capital
1

7. Example:
Consider the following draft trial balances...
7
Company B: DR CR
Interest revenue
(passive)
100
Cash
1
Interest receivable
100
Share capital
1
Company C: DR CR
Interest revenue
(passive)
100

8. Cash
51
Interest receivable
50
Share capital
1
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Company A: DR CR
Interest revenue
(passive)
100
Income tax
expense
30
Cash

9. 101
Current tax
liability
30
Share capital
1
8
Company B: DR CR
Interest revenue
(passive)
100
Income tax
expense
0
Cash
1
Interest receivable

10. 100
Current tax liability 0
Share capital
1
Company C: DR CR
Interest revenue
(passive)
100
Income tax
expense
15
Cash
51
Interest receivable
50
Current tax liability 15

11. Share capital
1
If we firstly account for current tax...
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Company A: DR CR
Interest revenue
(passive)
100
Income tax
expense
30
Cash
101
Current tax
liability
30

12. Share capital
1
9
Company B: DR CR
Interest revenue
(passive)
100
Income tax
expense
30
Cash
1
Interest receivable 100
Current tax liability 0
Deferred tax liab 30
Share capital 1
Company C: DR CR

13. Interest revenue
(passive)
100
Income tax
expense
30
Cash
51
Interest receivable 50
Current tax liability 15
Deferred tax liab 15
Share capital 1
If we now also account for deferred tax...
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▸ Two calculations are performed each year:
1. Current tax liability; and

14. 2. Movements in deferred tax balances.
Accounting for income tax
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1. Accounting for current tax
liability
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Calculation of taxable income from accounting profit (basic
format):
Accounting Profit (Loss):
Add: Accounting expenses that are not tax deductible
Add/(Less): Differences between accounting expenses and tax
deductions
Add/(Less): Differences between taxable income and accounting
revenue

15. Less: Accounting revenues that are not taxable
= Taxable profit
Taxable profit x tax rate % = Current Tax Liability
Calculation of current tax
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Recording current tax liability:
DR Income tax expense $...
CR Current tax liability $...
(to recognise current tax liability)
Journal entry to record current tax liability
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Activity – calculating taxable profit

16. and current tax liability, and
preparing current tax journals
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Activity
Accounting profit before tax for ABC Ltd for 2016 is as
follows: $60,000
After debiting the following expenses:
Goodwill impairment (not tax deductible) 5,000
Entertainment (not tax deductible) 3,000
Depreciation of new plant (calculated at 10% p.a.) 2,000
Annual leave expense 1,000
For tax purposes:
Depreciation rate for taxation purposes 20%
Annual leave paid 500
The tax rate is 30%.
Required: Calculate and journalise the current tax liability for
2016.

17. 15
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Solution
Profit before tax 60 000
Add/(less):
- Goodwill impairment (non-deductible) 5 000
- Entertainment (non-deductible) 3 000
- Depreciation on plant (accounting) 2 000
- Depreciation on plant (tax) (4 000)
- Annual leave expense (accounting) 1 000

18. - Annual leave paid (tax) (500)
Taxable Income: 66 500
Current tax liability (30%): 19 950
Journal entry to record current tax liability:
DR Income tax expense $19 950
CR Current tax liability $19 950
(recognise current tax liability) 16
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Review Question –
Calculation of current tax
17

19. Loftus et al (Chapter 12):
• Application and analysis exercise 12.4.
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2. Accounting for deferred tax
assets and deferred tax liabilities
18
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Discussion question –
deferred tax

20. 19
Share your thoughts on the following statement:
"One of the silliest constructs in the world of accounting
happens to
be deferred income taxes. I don't understand why we bother
with
deferred tax liabilities and deferred tax assets because they are
neither liabilities nor assets." (Ketz, 2010)
(Source: Leo, K., Hoggett, J., Sweeting, J. (2012). Company
Accounting.
(9th edition) (p. 260) Brisbane: John Wiley & Sons.)
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21. ▸ The existence of temporary differences results in the carrying
amounts of
an entity’s assets and liabilities being different from the
amounts that
would arise if a balance sheet was prepared for tax purposes.
▸ Carrying amount (CA): asset and liability balances (net of
accumulated depreciation, allowances etc) in the statement of
financial
position.
▸ Tax base (TB): asset and liability balances that would appear
in a “tax
balance sheet”.
Calculating DTA’s and DTL’s
20

22. More on this on the next slide
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Calculating the tax base
Calculating the tax base for an asset:
Carrying amount
– future taxable amounts
+ future deductible amounts
= Tax Base
Calculating the tax base for a liability:
Carrying amount
- future deductible amounts

23. = Tax Base
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▸ These temporary differences either result in:
The company paying more tax in the future
• Taxable temporary differences (TTDs)
• Result in deferred tax liabilities (DTLs)
The company paying less tax in the future
• Deductible temporary differences (DTDs)

24. • Result in deferred tax assets (DTAs)
DTA’s and DTL’s
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Example –Interest receivable
23
At 30 June 2016, ABC Ltd had interest receivable of $100.
At 30 June 2016, the carrying amount and tax base for interest
receivable is:
Carrying Tax Temporary

25. Amount Base Difference
Interest receivable 100 0 $100
This would be a taxable temporary difference,
and would result in a deferred tax liability of $30
(as $30 will be payable to the tax office when the
interest is received).
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QUESTION
Would the following items give rise to taxable temporary
differences or
deductible temporary differences?

26. Deductible temporary difference
is paid)
Taxable temporary difference
?
Neither
for tax purposes?
Deductible temporary difference
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Activity: calculate tax bases &

27. temporary differences
CA FTA FDA TB TTD DTD
Plant: cost $20,000,
accounting accum. depn
$2,000,
tax accum. depn $5,000
=
Vehicles: cost $30,000,
accounting accum. depn
$7,500,
tax accum. depn $5,000
=

28. Provision for warranty:
$3,000
=
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CA FTA FDA TB TTD DTD
Plant: cost $20,000,
accounting accum. depn
$2,000,
tax accum. depn $5,000
18,000 - 18,000 + 15,000 = 15,000 3,000
Vehicles: cost $30,000,

29. accounting accum. depn
$7,500,
tax accum. depn $5,000
22,500 - 22,500 + 25,000 = 25,000 2,500
Provision for warranty:
$3,000
3,000 - 3,000 = 0 3,000
26
Activity: calculate tax bases &
temporary differences
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30. Review Question –
Excluded temporary differences
27
Loftus et al (Chapter 12):
• Comprehension question 9:
Are all temporary differences that exist at the end of
the reporting period recognised as deferred tax assets
or deferred tax liabilities?
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Recognition and measurement of
deferred tax assets and deferred
tax liabilities

31. 28
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Deferred tax liabilities:
▸ Deferred tax liabilities must be recognised in full.
Deferred tax assets:
▸ Deferred tax assets relating to temporary differences and tax
losses are recognised only if:
• there are sufficient taxable temporary differences for the
entity
to use against the deductible temporary differences; OR
• if it is probable that the entity will have sufficient future
taxable
profit (against which the tax benefit can be offset).

32. Recognition criteria for DTL’s and DTA’s
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Calculating a deferred tax asset (DTA):
Deductible temporary difference x tax rate %
= DTA
Calculating a deferred tax liability (DTL):
Taxable temporary difference x tax rate %
= DTL

33. Note: The “tax rate %” is the rate which is expected to apply
when the asset
will be realised or the liability settled.
Measuring DTA’s and DTL’s
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Deferred tax worksheet
31
Carrying
Amount
Future Taxable
Amount

34. Future
Deductible
Amount
Tax Base Taxable
Temporary
Differences
(DTL)
Deductible
Temporary
Differences
(DTA)
$ $ $ $ $ $

35. Assets
Cash
Receivables
Plant
Goodwill
Liabilities
Bank Overdraft
LSL payable
Temporary differences
Excluded differences
Net temp differences
Deferred tax liability
Deferred tax asset

36. Beginning balances
Movement during year
Adjustment
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Activity – putting the current and
deferred tax calculations together
32
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Company A: DR CR
Gross profit

37. (Sales – COGS)
130
Wages 25
Annual leave exp 5
Cash 101
Share capital 1
Activity:
Consider the following draft trial balances...
33
Company B: DR CR
Gross profit
(Sales – COGS)
130

38. Wages 25
Annual leave exp 5
Cash 106
Provision for
annual leave
5
Share capital 1
Company C: DR CR
Gross profit
(Sales – COGS)
130
Wages 25

39. Annual leave exp 5
Cash 103.5
Provision for
annual leave
2.5
Share capital 1
Required:
Determine the taxable income for each entity, and current tax
payable. Determine
deferred tax asset and liability balances. (Assume first year of
operation, and 30% tax
rate).

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Company A Company B Company C
Accounting profit before tax 100 100 100
Add/(Less):
- Annual leave exp N/A 5 5
- Annual leave paid N/A (0) (2.5)
Taxable profit 100 105 102.5
Current tax liability (at 30%) 30 31.5 30.75
Current tax calculations:
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Deferred tax calculations:

41. Company A
CA FTA FDA Tax Base TTD DTD
$ $ $ $ $ $
Assets
Cash 101 101
Liabilities
Provision for annual leave 0 0 0
Temporary differences 0 0
Excluded differences
Net temp differences 0 0
DTL 0
DTA 0
Opening balances

42. Adjustment 0 0
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Deferred tax calculations:
Company B
CA FTA FDA Tax Base TTD DTD
$ $ $ $ $ $
Assets
Cash 106 106
Liabilities
Provision for annual leave 5 5 0 5
Temporary differences 0 5

43. Excluded differences -
Net temp differences 0 5
DTL 0
DTA 1.5
Opening balances -
Adjustment 0 1.5
36
DTA
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Deferred tax calculations:
Company C
CA FTA FDA Tax Base TTD DTD

44. $ $ $ $ $ $
Assets
Cash 103.5 103.5
Liabilities
Provision for annual leave 2.5 2.5 0 2.5
Temporary differences 0 2.5
Excluded differences -
Net temp differences 0 2.5
DTL 0
DTA 0.75
Opening balances
Adjustment 0 0.75

45. 37
DTA
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Company A: DR CR
Gross profit
(Sales – COGS)
130
Wages 25
Annual leave exp 5
Income tax
expense
30

46. Cash 101
Current tax
liability
30
Share capital 1
38
Company B: DR CR
Gross profit (Sales
– COGS)
130
Wages 25
Annual leave exp 5

47. Income tax
expense
31.5
Cash 106
Provision for
annual leave
5
Current tax liability 31.5
Share capital 1
Company C: DR CR
Gross profit (Sales
– COGS)
130

48. Wages 25
Annual leave exp 5
Income tax
expense
30.75
Cash 103.5
Provision for
annual leave
2.5
Current tax liability 30.75
Share capital 1
After accounting for current tax...

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Company A: DR CR
Gross profit (Sales
– COGS)
130
Wages 25
Annual leave exp 5
Income tax
expense
30
Cash 101
Current tax liability 30

50. Share capital 1
39
Company B: DR CR
Gross profit (Sales
– COGS)
130
Wages 25
Annual leave exp 5
Income tax
expense
31.5-
1.5

51. Cash 106
Deferred tax asset 1.5
Provision for
annual leave
5
Current tax liability 31.5
Share capital 1
Company C: DR CR
Gross profit (Sales
– COGS)
130
Wages 25
Annual leave exp 5

52. Income tax
expense
30.75-
0.75
Cash 103.5
Deferred tax asset 0.75
Provision for
annual leave
2.5
Current tax liability 30.75
Share capital 1
and then accounting for deferred tax...

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Review Question –
Tax effects of a temporary difference
40
Loftus et al (Chapter 12):
• Application and analysis exercise 12.1.
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Activity – completing the deferred
tax worksheet and journal for
deferred tax

54. 41
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Example: deferred tax calculations
ABC Ltd – Statement of Financial Position (DRAFT) as at 30
June 2016
Assets 2016
Cash 12 000
Accounts receivable 45 000
Less: allowance for doubtful debts (5 000)
Inventory 88 000
Interest receivable 5 000
Plant and equipment 100 000

55. Less: accumulated depreciation (10 000)
Goodwill 20 000
Liabilities
Accounts payable 26 000
Provision for warranty 32 000
Provision for annual leave 8 900 42
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Example – additional information:
▸ ABC Ltd commenced operations on 1 July 2015.
▸ Accumulated depreciation for tax purposes was $20,000 at 30
June
2016.

56. ▸ The company tax rate is 30%.
Required:
Determine and record the movements in deferred tax assets and
liabilities
for the year ended 30 June 2016 using an appropriate worksheet.
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Answer:
CA FTA FDA Tax Base TTD DTD
$ $ $ $ $ $
Assets

57. Cash 12 000 0 0 12 000
Receivables 40 000 0 5 000 45 000 5 000
Inventory 88 000 (88 000) 88 000 88 000
Interest receivable 5 000 (5 000) 0 0 5 000
Plant and equipment 90 000 (90 000) 80 000 80 000 10 000
Goodwill 20 000 20 000 0 0 20 000
Liabilities
Accounts payable 26 000 - 26 000
Provision for warranty 32 000 (32 000) 0 32 000
Provision for annual leave 8 900 (8 900) 0 8 900
Temporary differences 35 000 45 900
Excluded differences 20 000 -
Net temp differences 15 000 45 900

58. DTL 4 500
DTA 13 770
Opening balances - -
Adjustment 4 500 Cr 13 770 Dr
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Entry to record deferred tax movement:
Dr Deferred tax asset 13 770
Cr Income tax expense 9 270
Cr Deferred tax liability 4 500
(Record movement in deferred tax assets and liabilities for the

59. year ended
30 June 2016)
Answer:
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Review Question –
Calculation of deferred tax, and adjustment
entry
46
Loftus et al (Chapter 12):
• Application and analysis exercise 12.11.

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What do we need to do in the
event of a change in tax rate or
a tax loss?
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▸ When a new tax rate is enacted, that new rate should be
applied:
• when calculating current tax liability,
• when calculating adjustments to deferred tax accounts,

61. • to carried forward deferred tax balances from previous years if
that new rate will apply when the assets and liabilities are
realised.
Accounting for a change in tax rate
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▸ Tax losses are created when allowable deductions exceed
assessable income.
▸ The tax act allows losses to be carried forward and used as a
deduction against future taxable income.
▸ Tax losses provide future deductions and (subject to
recognition

62. criteria) create deferred tax assets.
Accounting for tax losses
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Accounting for tax losses
▸ Recoupment occurs as soon as the company earns taxable
income/profit.
▸ The tax loss recouped is recorded in the calculation of
taxable
income, and a journal entry raised to reverse the DTA.
50

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Review Question –
Exempt income and tax losses
51
Loftus et al (Chapter 12):
• Comprehension question 11:
What is the impact of exempt income on the
determination and recovery of a tax loss?
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Activity – accounting for tax

64. losses and recoupment of tax
losses
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Activity
Accounting profit before tax for ABC Ltd for the year to 30
June 2016 is as follows:
Sales revenue $500,000
Government grant (exempt income) 5,000
Less: Cost of sales (400,000)
Interest expense (50,000)
Salaries and wages (70,000)
Rent expense (20,000)

65. Accounting profit / (loss) before tax -35,000
For tax purposes:
All interest, salaries & wages, and rent expenses have been paid
as at 30 June 2016.
The tax rate is 30%.
Required: Calculate and journalise the current tax liability (or
DTA in the event of a tax loss) for 2016.
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