Fin Reporting 06 Income Tax Accounting Week 1

Chapter 6
Accounting for Income Tax
www.learnnowbiz.com Prepare Financial Reports for Corporate Entities 1

Overview
Accounting for Companies is regulated by

• Australian Accounting Standards Board (AASB) and
• Income tax legislation for preparation of specific
income tax reports.
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Overview Continued
• Income tax legislation and AASB's may treat items

differently
• Some of these differences will be permanent, such as

fines.
• Other temporary timing differences result from a

simple difference on a yearly basis, with the overall
treatment being the same (over a period of years).

Accounting Profit and Taxable Income:
Permanent Differences
Arise when income/expense items are

recognised for accounting but never for tax
purposes or vice-versa.

Examples
Item Accounting Tax
Treatment Treatment
Receipt of Recognised as Not

exempt income assessable as
income – ie income
COVID
payments
Entertainment Recognised as Not allowable
expenses an expense deduction
unless subject
to Fringe
Benefits Tax
Penalties and Recognised as Not an
fines an expense allowable
when incurred deduction
Impairment of Recognised as Not an
goodwill an expense in allowable
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accordance deduction
Prepare Financial Reports for Corporate Entities 5
with AASB 136
Temporary Differences
Arise when income/expense items are

recognised for accounting but are not
assessable/deductible for tax until a future time.
The opposite can also apply – income/expense is

assessable but not for accounting until a future
period.

Example
Item Accounting Tax Treatment
Treatment
Doubtful debts Expense recognised by Not an allowable

recording deduction until
an allowance when a the debt is deemed
debt is bad and
considered doubtful physically written
off
Provision for Expense is recognised Not an allowable
annual leave / as the deduction until
Long service employee’s the entitlement is
leave entitlement accrues in paid to the
accordance with AASB employee
119

Reconciliation of Accounting Profit to Taxable
Income

Current tax payable
AASB112
Current tax payable = Taxable income x tax rate
(30%)
Review example on page 133 and Self Testing exercise 1

Question
Syria Ltd reported a net profit before income tax of $1,800,000 for the year ended 30 June
2022.
Profit was determined after charging the following items :
Impairment of goodwill $8,00
0
Depreciation of plant & equipment $20,00
0
Depreciation of motor vehicles $6,000
Doubtful debts $4,000
For Tax purposes, deductions were not allowed in respect of the above except for a
Increase in provision of LSL $9,000
deduction of depreciation expense on plant & equipment of $30,000 and $5,000 for
motor vehicles
Assume a tax rate of 30%
Required :
A statement reconciling pre tax profit to taxable income
A journal entry to account for current tax payable

Chapter solution
Profit before tax 1,800,000
Add expenses not allowed as deductions for tax
Impairment loss on goodwill 8,000
Depn of P & E 20,000
Depn of M.V 6,000
Doubtful debts 4,000
Increase in provision LSL 9,000
Total 47,000
Less Allowable deductions
Depn of P & E 30,000
Depn of M.V 5,000
35,000
taxable income 1,812,000

General Journal
General Journal
Income tax expense 543,600
Current tax payable 543,600
Income tax payable on taxable
income of 1812,000 @ 30%

Question – Similar Ltd
Similar Ltd reported a net profit before tax of
$9,000,000 for the year ended 30 June 2020
Profit was determined after charging the following
items
Impairment loss on goodwill 40,000
Depn of P & E 100,000
Depn of M.V 30,000
Doubtful debts 20,000
Increase in provision LSL 45,000
For tax purposes, deductions were not allowed in respect of the above
except for a deduction of depreciation expenses P & E of $150,000 and
$25,000 MV . Assume 30% tax rate
Prepare a statement reconciling pre tax accounting profit to taxable
income
Prepare a journal entry to account for current tax payable
Question - Similar Ltd
A. Reconciling pre tax accounting profit with taxable income
Profit before tax 9,000,000
Add expenses not allowed as deductions for tax
Impairment loss goodwill 40,000
Doubtful Debts 20,000
Provision of LSL 45,000
Depn Plant & Equipment 100,000
Depn MV 30,000
9,235,000
Less allowable deductions not included in expenses
Depn Plant & Equipment 150,000
Depn MV 25,000
Taxable income 9,060,000
Dr Income Tax Expense 2,718,000
CR Current tax payable 2,718,000
Calculation of tax payable on taxable income of 9060000

Tax Payable Method
The tax payable method may be likened to a cash
basis of accounting. Only Companies that are not
required to prepare general purpose financial
reports can use this method.

Steps in Tax Payable Method
1. Calculate taxable income

2. Calculate tax payable (Taxable Income * Tax%)
3. Recognise the amount payable:
Debit Income Tax Expense (Expense)

Credit Current Tax Payable
(Liability)

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Chapter 6

Accounting for Income Tax

www.learnnowbiz.com Prepare Financial Reports for Corporate Entities 1

Accounting for Companies is regulated by

www.lnonline.com Prepare Financial Reports for Corporate Entities 2

• Income tax legislation and AASB's may treat items

• Some of these differences will be permanent, such as

• Other temporary timing differences result from a

www.lnonline.com Prepare Financial Reports for Corporate Entities 3

Arise when income/expense items are

www.lnonline.com Prepare Financial Reports for Corporate Entities 4

Receipt of Recognised as Not

Arise when income/expense items are

The opposite can also apply – income/expense is

www.lnonline.com Prepare Financial Reports for Corporate Entities 6

Doubtful debts Expense recognised by Not an allowable

www.lnonline.com Prepare Financial Reports for Corporate Entities 7

www.lnonline.com Prepare Financial Reports for Corporate Entities 8

Review example on page 133 and Self Testing exercise 1

www.lnonline.com Prepare Financial Reports for Corporate Entities 9

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www.lnonline.com Prepare Financial Reports for Corporate Entities 12

Add expenses not allowed as deductions for tax

Impairment loss goodwill 40,000

Doubtful Debts 20,000

Provision of LSL 45,000

Depn Plant & Equipment 100,000

Less allowable deductions not included in expenses

Depn Plant & Equipment 150,000

Taxable income 9,060,000

Dr Income Tax Expense 2,718,000

CR Current tax payable 2,718,000

Calculation of tax payable on taxable income of 9060000

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1. Calculate taxable income

Debit Income Tax Expense (Expense)

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