deferred tax

Examples of deferred tax in the following topics:

• Overview of Income Tax Accounting

  • Also, the actual amount of tax liability due to the IRS may not be the same as the income tax expense reported on the income statement.
  • In this method, the deferred income tax amount is based on tax rates in effect when the temporary differences originated.
  • The deferred method is an income-statement-oriented approach.
  • In the asset-liability method, deferred income tax amount is based on the expected tax rates for the periods in which the temporary differences reverse.
  • Summarize how to account for deferred taxes under the deferred method and the asset-liability method

• Other Current Liabilities: Sales Tax, Income Tax, Payroll, and Customer Advances

  • Other current liabilities reported on the balance sheet are sales tax, income tax, payroll, and customer advances (deferred revenue).
  • If the book-tax difference is carried over more than a year, it is referred to as a deferred tax.
  • Future assets and liabilities created by a deferred tax are reported on the balance sheet.
  • The receipt of $12,000 for the annual maintenance contract is initially recorded as deferred revenue.
  • Explain how sales tax payable, income tax payable, salaries and wages payable and deferred revenue appear on the financial statements

• Unearned and Deferred Revenues

  • Examples of deferred items include annuities, charges, taxes, income, etc.
  • If the deferred item relates to revenue (cash has been received), it is carried as a liability.
  • An example of a deferred revenue is the monies received for a 12-month magazine subscription.
  • A deferred revenue item involves cash received before the earnings process is complete.
  • Explain the purpose of classifying transactions as either deferred or unearned revenue

• Terminology of Accounting

  • Accrual accounts include, among others, accounts payable, accounts receivable, goodwill, deferred tax liability and future interest expense.

• Preparation of the Income Statement

  • ., depreciation and amortization of various assets) and taxes.
  • Income tax expense is the sum of the amount of tax payable to tax authorities in the current reporting period (current tax liabilities/ tax payable) and the amount of deferred tax liabilities (or assets).

• Differences Between Accrued and Deferred Expenses

  • Accrued and deferred expenses represent the two possibilities that can occur due to timing differences under the matching principle.
  • A deferred expense is an asset that represents a prepayment of future expenses that have not yet been incurred.
  • Deferred expense is generally associated with service contracts that require payment in advance.
  • So the business will record a $12,000 deferred expense asset.
  • Accrued and deferred expenses are both listed on a company's balance sheet.

• The LIFO Reserve

  • This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.
  • Suppose a company uses FIFO for its internal accounting system, but wants to use LIFO for financial and income tax reporting (due to continuous inflation of its costs).
  • The change in the balance of the LIFO reserve during the current year times the income tax rate results in the difference in the income tax for the year.
  • Changing this formula slightly, one can find the difference in income tax since LIFO was adopted (the balance in the LIFO reserve times the income tax rate).

• Cost of Goods Sold and Gross Profit

  • Note that this is different from operating profit (earnings before interest and taxes).
  • Net income (or Net profit) = Operating profit – taxes – interest
  • The costs of those goods not yet sold are deferred as costs of inventory until the inventory is sold or written down in value.

• LIFO Method

  • For this reason, if LIFO is applied on a perpetual basis during the period, special inventory adjustments are sometimes necessary at year-end to take full advantage of using LIFO for tax purposes.
  • Since the 1970s, some U.S. companies shifted towards the use of LIFO, which reduces their income taxes in times of inflation, but with International Financial Reporting Standards banning the use of LIFO, more companies have gone back to FIFO.
  • The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the "LIFO reserve. " This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.
  • For this reason, if LIFO is applied on a perpetual basis during the period, special inventory adjustments are sometimes necessary at year-end to take full advantage of using LIFO for tax purposes.

• Importance of Recognition and Measurement

  • Deferred expense (prepaid expense) allows matching costs of products paid out to those not received yet.
  • Accrued expenses shares characteristics with deferred revenue.
  • Deferred expenses, or prepaid expenses or prepayment, are an asset.
  • Deferred expenses share characteristics with accrued revenue.
  • Prepaid expenses, such as employee wages or subcontractor fees paid out or promised, are not recognized as expenses (cost of goods sold), but as assets (deferred expenses), until the actual products are sold.