RAJU (LEARNER) 17 May 2010
Provision for deffered tax is to be made as required by AS 22.
Profit of an entity as per the books will be different from the income computed as per Income Tax Act. The possible reasons for this is change in depreciation rate, certain expenses not allowed as per IT Act like items covered U/s.43B, 40(a).....
Provision for Income-tax is made in the books based on the income computed as per IT act. However, the expenses which are disallowed in one year are allowed to be deducted on payment basis in the year of payment (43B, 40(a)) and depreciation which over the period of time will come in line with both books and IT. These items which are capable of being reversal over a period of time are called timing differences. Such differences are capable of adjustment and hence the tax effect of the same needs to be provided in the books so as to give a true & fair view ........
In view of above, amount equal to tax rate on timing differences is provided in the books which denotes either benefit to be availed or foregone in future.
Rahul (B.Com LL.B ICWA(Finalist)) 17 May 2010
Pl go through the appended text........hope u will satisfy......
Deffered Tax represents a company's liability for taxes owed that is postponed to future periods. Deferred taxis primarily the result of tax law that allows firms to write off expenses faster than they are recognized and thus create a deferred tax liability. For example, under tax law companies can often depreciate fixed assets at a faster rate for tax purposes than the actual use of the asset would dictate. Theoretically, the resulting difference between income under Generally Accepted Accounting Principles and income for tax purposes sets up a deferred tax liability for the apparent taxes owed to the IRS in the future. In actual practice, the deferred tax liability may be postponed indefinitely if the company continues to buy new equipment. Over the past decades, accounting standards for deferred tax have been revised substantially. The rules for deferred tax remain complex and, in some circles, controversial. Some observers argue that deferred tax is merely an accounting fiction and that no deferred tax should be recognized, because the only tax liability is the amount actually owed to the IRS.
Ramana Rao (FINANCE MANAGER & ASS SAP FI/CO CONSULTANT) 18 May 2010
how to caluclate deffered tax can any one give practical example and also what are the entries.
please exemplify right from trial balance
|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|
|Deferred Tax Asset is recognised in current year for reduction in tax payable in future years.|
|When Timing Difference Would result into DTA/DTL|
|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|
|Current Tax A/c………………Dr.|
|To provision for current tax|
|Deferred tax A/c………………Dr|
|To deferred tax liability A/c.|
|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|
|To Current Tax A/c.|
AS - 22.................