Question

1. What are the main principles of tax effect accounting?

2. In relation to tax effect accounting, what is a deductible temporary difference? Give two examples of deductible temporary differences.

Answer 1

1. Main principles of tax effect accounting is the principle that current and deferred tax consequences arise from

a) future recovery (settlement) of carrying amount of assets (liabilities) that are recognized in entity's statement of financial position  

b) the current and future tax consequence of transactions and other events recognized in an entity's financial statements.

2. A deductible temporary difference is a temporary difference that yield amounts that can be deducted in the future when determining taxable profit or loss. It is the difference between the carrying amount of assets or liabilities and its tax base.

Examples of temporary difference are:

A) Research and development costs- any difference between carrying amount and tax base is a temporary difference.

B) Accounts receivable- any difference between carrying amount and tax base is a temporary difference.