Accounting Essay example

1512 Words Apr 23rd, 2014 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 position”. Through this essay, the author wants to …show more content…
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

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