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Income tax - accounting treatment and presentation (exclude Computation)

Tax as recorded in a company’s financial statement rarely ever matches the taxes filed in their

tax returns. It is because each item (company financials and tax return) has different purposes,

users, and accounting treatment. The financial statements report a tax expense, but the true tax

payable comes from the tax return. The dichotomy in reporting these two items creates

differences that need to be reconciled and accounted for. These differences are either

permanent differences, which never reverse, or temporary differences, which are timing

differences that will reverse over time.

To understand the above terms, let us take an example –

If we purchase one asset worth $1000 at the beginning of the year and Depreciation rate as per

financial reporting purpose is 10% and as per tax law is 20% and profit before depreciation and

tax is $ 500.

Accounting profit will be ($500 – Depreciation as per accounting ($1000*10% = $100) i.e. $400.

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