Accounting Essay

1517 words - 7 pages

Every entity at the end of the accounting period will make financial record in order to determine the profit or loss during the period. Any income of the entity must be subject to the tax even though they are having profit or suffering loss. The accounting treatment for income taxes is determined by Australian Accounting Standards Board (AASB) 112 which adopts the tax effect method that incorporates both current and future tax consequences of “transactions and other events of the current period that are recognised in an entity’s financial statements and the future recovery (settlement) of the carrying amount of assets (liabilities) that are recognised in an entity’s statement of financial ...view middle of the document...

As every entity wants to pay less tax, therefore tax loss will be carried forward in order to reduce the future taxable income when the carrying amount of tax loss is recuperated. In the future period, the amount that actually paid is the income tax in the current period minus the tax loss from previous period so the tax that have to be paid might be lower which means it makes the entity more favourable. Since the entity pay less tax, thus it creates deferred tax asset. (Leo, Hogget & Sweeting, 2012)
For instance, assume Company LA has assessable income $10,000 and allowable deduction $15,000. In other words, the company is having $5000 loss. As it is loss which means the taxable income is negative, the company does not have to pay taxes on that year. Furthermore, assume Company LA generates more money in the next year and records $25,000 of taxable income and pays a corporate tax rate of 20%. Supposedly, the entity would need to pay $5000 ($25,000 x 20%) in taxes. However, because of the tax loss that carryforward from the previous year, therefore Company LA only owes $4000 (($25,000 - $5,000) x 20%) in taxes. $5,000 of tax loss is recognised as deferred tax asset as it is already proven that it decreaces the tax to be paid.
Based on paragraph 5 of AASB 112, deferred tax asset can be defined as the amount of income taxes that able to be recovered in the future periods regarding the deductible temporary differences which lead to a result in amounts that deductable by the tax in the future when the liability is settled or the carrying amount of the asset is recovered (Deloitte, 2013), the unused tax losses and unused tax credits that are carried forward.
Under the The AASB Framework for the Preparation and Presentation of Financial Statements (AASB Framework), it is stated that asset is “a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity”. AASB 112 paragraph 14 revealed “When a tax loss is used to recover current tax of a previous period, an entity recognises the benefit as an asset in the period in which the tax loss occurs because it is probable that the benefit will flow to the entity and the benefit can be reliably measured.” Therefore the author wants to explain why deferred tax asset that is due to tax loss can be also recognised as an asset.
Firstly, deferred tax asset is a result of past event as it is generated by tax loss that happen in the past. Secondly, deferred tax asset can be controlled by the entity because can determine its accounting rate, for example is the depreciation rate; and it is up to the decision of the entity as there is no expiration date (time limit) of the validation of deferred tax asset. Thirdly, there is a future economic benefit flows to the entity from deferred tax asset, it can be proved that the entity will pay less amount of tax in the future (Read and Bartsch, 1992).

In addition, there are some recognition...

Other Essays Like Accounting

Accounting Essay

581 words - 3 pages as follows. Section II discusses the background of IFRS adoption in Europe. Section III reviews prior research and provides the basis for interpreting the market reaction to each event. Section IV describes our data and research design. Section V presents our empirical results, and Section VI presents sensitivity analyses. Section VII concludes. Literature review Debates about financial reporting and accounting standards can seem arcane

Accounting Essay

2152 words - 9 pages Introduction During the recent years the use of cloud based accounting information systems (AIS) in business organisations has been growing rapidly. In a survey conducted by Mimecast across the U.S. and Canada on cloud computing adoption by businesses, it has been found that 51 percent of the business ventures have already adopted cloud computing. The survey also indicated that 66 percent of enterprises are considering about the adoption of


2404 words - 10 pages management. Levitt specifically addresses five of the most popular tricks used by firms to smooth earnings. Secondly, Levitt outlines an eight part action plan to recover the integrity of financial reporting in the U.S. market place. What are the basic objectives of financial reporting? Generally accepted accounting principles provide information that identifies, measures, and communicates financial information about economic entities to reasonably

Accounting - 1018 words

1018 words - 5 pages iPhone at Apple, Inc.: The case provides students with an understanding of the criteria for revenue recognition and the role of accrual accounting in reflecting timing differences between cash receipts and product/service delivery, especially in situations where there are multiple deliverables. The case also enables students to reflect on (a) the use of supplementary non-GAAP disclosures, (b) the impact of accounting on firm value and (c

Accounting - 1993 words

1993 words - 8 pages Maytag they sales became higher for the company than in 2005. Week 4 Read ATC 7-5 in Chapter 7. This situation is very similar to what a company called Enron did several years ago. Use the internet or the university library to research exactly what Enron did in their accounting procedures and what eventually happened to the company. Post your findings and understanding of Enron’s story and respond to two other students’ postings with enhancements

Accounting - 687 words

687 words - 3 pages cost information. For companies using activity-based costing systems, a switch to activity-based budgeting makes sense. An activity-based budget is prepared by focusing on the budgeted costs of activities needed to produce and/or sell products and service instead of using the traditional approach. 7. Describe responsibility centers and responsibility accounting An organizational structure includes lines of responsibility within the

Accounting - 1173 words

1173 words - 5 pages . GAAP. “Generally Accepted Accounting Principles (GAAP) vary from International Financial Reporting Standards in that under GAAP rules, dividends received from a company's investing activities is reported as an "operating activity," not an "investing activity." (Accounting Info) Cash flows from interest and dividends received and paid are disclosed separately. Each is classified in a regular manner from date to date as operating, investing or

Accounting - 2946 words

2946 words - 12 pages Decorus Dea Notes to Consolidated Financial Statements Notes 1 Summary of Significant Accounting Policies Nature of Operations: The Decorus Dea (the “Company,” “we” or “us”) business is focused on providing high end, off the runway clothing and beauty products of superior quality and value. Our stores are located in four different states, Georgia, Florida, California and New York and consist of 56 stores. Our stores are located inside

Accounting - 4330 words

4330 words - 18 pages ACC 312 Fundamentals of Managerial Accounting Midterm Exam 1, Spring 2014 Test Form A SOLUTION Name ______________________________________________________________________ UTEID ____________________________________ Instructor ____________________________________________ Class Days ___________________ Time ______________________ DO NOT OPEN until given instructions to do so. Instructions Pages are numbered sequentially, including

Accounting - 1854 words

1854 words - 8 pages rate of 5.5%. However, because of stable employment experience, the company’s state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Williams Co.? a. $35,100 b. $24,600 c. $12,000 d. $8,400 11. In accounting for compensated absences, a company following the guidance in FASB Statement No. 43 would account for the liability using the: Cash

Accounting - 762 words

762 words - 4 pages Chapter 8 – 3, 4 & E 8-5 and Chapter 9 – E 9-9 Questions University of Phoenix ACC 400 Chapter 8 – Question 3 1. What are the essential features of the allowance method of accounting for bad debts? The essential features of the allowance method of accounting for the bad debts according to Kimmel, Weygandt, & Kieso are: • Companies estimate uncollectible accounts receivable and match them against

Related Papers

Accounting Essay 566 Words

566 words - 3 pages The Nature of Cost Accounting Cost accounting has been defined by many accounting scholars in various forums. There is no one watertight definition of cost accounting, but the various definitions all point to certain common aspects about the subject. Below are some definitions by certain authorities : “That part of management accounting which establishes budgets and standard costs and actual costs of operations, processes, departments or

Accounting Essay 727 Words

727 words - 3 pages The future of the accounting profession will be a period of increased change and continuous development. The industry will require new levels of business flexibility and competition will intensify because new industry entrants will outsource and automate accounting, audit, and tax professionals, especially for routine and lower-value services. Financial service companies, banks, software and Internet firms will soon offer an increasing amount of

Accounting Essay 1305 Words

1305 words - 6 pages AN OVERVIW OF CREATIVE ACCOUNTING AND WINDOW DRESSING Introduction: Every organization is expected to operate within the confinement of best practices or core competence at least, which has tendency of leading them to distinctive competence or exceptional practice. Since business operations center basically on finance, firms therefore take the accounting records of their organizations very serious as it determines their stay in industry or

Accounting Essay 762 Words

762 words - 4 pages Jack in the Box Unethical Accounting Business The article I have chosen to summarize highlights the accounting practices of a San Diego--based company, Jack in the Box, Inc. (NYSE: JBX). In addition to summarizing the article, I will discuss how the concepts of the article relate to my organization The Platinum Company Inc., including, making recommendations for improvement for my organization based on the article. Lastly, explain the