AS 22

Objective

Traditionally amount of tax payable is determined on the profit/loss computed as per income tax laws.

According to AS-22

Tax on income is determined on the principle of accural concept.

According to this concept,

Tax should be accounted in the period in which corresponding revenue and expenses are accounted.

(i.e) tax shall be accounted on accrual basis ; not on liability to pay basis.

Deferred Tax is tax effect of timing differences.

Deferred Tax Asset/Liability

As per AS-22,

Income tax should be treated just like any other expenses on accrual basis

 irrespective of the timing of payment of tax.

Difference between tax expenses(which is calculated on accrual basis) and current tax liability,

to be paid for particular period as per IT act is called deferred tax(Assets/Liability).

Tax expenses = Current Tax + Deferred Tax

Deferred Tax Liability is

Recognised for timing differences that will result in taxable amount in future years.

Ex. A timing difference is created between depn. As per books of accounts & depn. Claimed under

tax laws which is in intial years higher than depn. Claimed as an expense in the Financial statements.

Deferred Tax Asset is

Recognised for timing differences that will result in deductible amounts in future years and for carry

forwards.

Deferred Tax Asset is recognised in current year for reduction in tax payable in future years.

When Timing Difference Would result into DTA/DTL

Item

When

When

Result

Recognised

Considered

In P&L

in computation

of income tax

Revenue/Gain

Earlier

Later

Deferred Tax Liability

Revenue/Gain

Later

Earlier

Deferred Tax Asset

Expense/Losses

Earlier

Later

Deferred Tax Asset

Expense/Losses

Later

Earlier

Deferred Tax Liability

Journal Entry

Current Tax A/c………………Dr.

To provision for current tax

Deferred tax A/c………………Dr

To deferred tax liability A/c.

OR

Deferred tax Assets A/c………………Dr

To deferred tax  A/c.

Tax expense A/c………..Dr.

Deferred tax  A/c………..Dr 

In case DTA is created

To Current Tax A/c.

To Deferred Tax A/c.

In case DTL is created

P&L A/c………………….Dr.

To Current Tax A/c.

Regards

K.Ilayaraja.