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I am a bit confused as to why the income tax amount was reduced by the decrease in taxable temporary differences. This particular aspect of questions giving me a very hard time. I watched the lecture at least 5 times today and still have not grasped the concept for this topic.
Respectfully
ShamelaBecause the income tax amount brought forward was a debit whereas normally (at least, often) it’s a credit
Let me give you a little hint here to help in passing the exam by scoring the marks for the tax adjustment.
When calculating the tax figures in a preparation of financial statements question, don’t worry about the logic of what’s happening! (I hate to be saying this, but until you can get the values right, don’t worry about the logic)
In this example:
1 – open up the two T accounts and put in the figures brought forward
2 – put in the debit side of the current tax account, above the total lines, the liability to carry forward
3 – calculate the figure to carry forward in the deferred tax account and ….. carry it forward from above the line debit side to below the line credit side
4 – balance off the deferred tax account and double enter the missing figure to current tax account
5 – balance off the current tax account and take the missing figure to statement of profit or loss
Stop getting into a tangle with this topic – it is REALLY straight forward until you start thinking about it!
The income tax amount was a credit balance in the question Sir. I looked at the examples we worked during the lectures. The question Jurgita’s where we accounted for deferred tax on the accrual basis to bring the financials to most accurate state. Then in the following year expense it out.
Sorry, my misread of the question!
But still the above steps are valid!
Don’t think of the movement in deferred tax as a reduction of of the income tax LIABILITY. It is a reduction of the income tax CHARGE to the statement of profit or loss as also is the $400 credit balance brought forward.
If you really want to understand the logic, try this.
The $400 is an over provision of the previous year’s liability (we provided, say, $10,000 but settled for $9,600) so we’ve taken $400 too much out of last year’s profits
The same works with the deferred tax – we’ve taken $11,200 out of previous years’ profits and now we’ve decided that we only need $10,000 provision so we can take $1,200 back to the statement of profit or loss.
We still owe $18,700 tax on this year’s profits but the charge to the statement of profit or loss is reduced by the two respective amounts over provided in prior years
Is that better?
Oh so basically instead of accounting for it separately we net the two balances off?
Thanks its clearer now
That’s cool – would you be answering other questions today? Because I posted two more questions under the same 8 Taxation topic for questions 5 & 9.
Respectfully
Shamela
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