Method of accounting
1. Income statement liability method — This method focuses on timing differences only in the computation of deferred tax asset or deferred tax liability.
As the method suggests, timing differences affect the income statement of one period and will reverse in the income statement of one or more subsequent periods.
2. Balance sheet liability method - This method considers all temporary differences including timing differences. There are temporary differences that affect the balance sheet only and therefore technically are not timing differences but nonetheless are recognized in computing deferred tax asset or liability.
PAS 12 requires the use of the balance sheet liability method
However, the income statement liability method is illustrated first is known as interperiod tax allocation. The following are followed in accounting for income tax:
1. Determine the “taxable income”
The taxable income multiplied by the tax rate equals the current tax expense.
The entry to record the current tax expense is:
Income tax expense xx
Income tax payable xx
Current tax expense is the amount of income tax paid or payable for a year as determined by applying the provisions of the enacted tax law to the taxable income.
2. Determine the “taxable temporary differences”
The amount of taxable temporary differences multiplied by the tax rate equals the deferred tax liability. The entry record the deferred tax liability is:
Income tax expense xx
Deferred tax liability xx
3. Determine the “deductible temporary differences”
The amount of deductible temporary differences the tax rate equals the deferred tax asset. The entry to record the deferred tax asset is:
Deferred tax asset xx
Income tax benefit xx
The “income tax benefit account” reduces the current tax expensefor the year and is a deduction from current tax expense. The deferred tax asset may be...