The main principles of accounting for income tax are

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The main principles of accounting for income tax are that a company should recognise both: the current tax consequences of the transactions and events of the period as reflected in the calculation of taxable profit the future or deferred tax consequences that will arise from the recovery of assets and settlement of liabilities Accordingly, income tax expense includes a current tax component based on the transactions and events of the current period and deferred tax component that is attributable to changes in asset and liability balances during the current period. The required note disclosure for income tax expense makes this clear as shown in the textbook. The components of income taxation expense are as follows: Current tax expense $78 000 Deferred tax expense from origination and reversal of temporary differences 54 000 Total income tax expense $ 132 000 The main principles of accounting for income tax consider not only the current tax consequences, but place special emphasis on the future tax consequences arising as a result of differences between the carrying amounts of an entity’s assets and liabilities determined under accounting standards and the tax bases of those assets and liabilities determined under income tax legislation. 2. Accounting profit is based on a full accrual model whereas taxable profit is based on a partial accrual model. Explain this comment by reference to the following items: long service leave, doubtful debts, prepayments, warranty costs, interest costs, development costs and rent received in advance. In accordance with paragraph 27 of AASB 101 Presentation of Financial Statements , the financial statements other than the statement of cash flows must be prepared using the accrual basis of accounting. In contrast, taxable profit uses a partial accrual model because some items must be recognised on a cash basis.
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Long service leave is accrued for accounting purposes resulting in the provision for employee benefits, however, for tax purposes it is only recognised as an allowable deduction when the leave is actually taken by an employee and paid in cash. Doubtful debts are accrued as an accounting expense resulting in the contra-asset Allowance for Doubtful Debts. In contrast, the deduction is only allowed for tax purposes when the debt is written off accounts receivable as bad indicating that the cash from the customer is not going to be collected. Prepaid insurance is recognised as an asset for accounting purposes and then charged to expense over time as the benefits of the asset are consumed. The tax treatment is to record the amount prepaid as an allowable deduction immediately (at the time of payment). Warranty expenses are recognised on the sale of goods for accounting purposes resulting in the provision for warranty, whereas for tax purposes the deduction is not allowed until the goods are fixed under warranty and the entity has effectively paid for the warranty.
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