Accounting treatment: 2004 to profit or loss
Tax treatment: pre-tax deduction allowed when actually incurred
According to the tax payable method:
2004 2005
Taxation: total profit 1000 1000
Estimated warranty expense 200 (200)
Tax payable Taxable Income 1200 800
Accounting: Income Tax Expense (396) (264)
Net Income 604 736
Analysis of the sales of products in 2004, the projected warranty costs of 2 million yuan, accounting in the calculation of the profit in 2004, but also this projected costs to the income statement, which is in line with the principle of accrual. The problem is that the projected warranty expense is not recognized in tax law. In other words, the tax law does not allow a pre-tax deduction when determining the income tax payable by the company in '04. But the tax law doesn't always disallow it. It recognizes it when it is actually incurred. That is, it recognizes it when it occurs in '05. What does the recognition mean? It means that it can be deducted before tax in 2005, which means that it can reduce the amount of income tax payable in 2005, which means that the projected warranty expense can reduce the outflow of economic benefits in 2005, and the reduction of outflow of economic benefits can also be regarded as the inflow of economic benefits. In other words, it is expected that warranty expense can bring economic benefits outflow to the enterprise in the future.
Selling products in 04, the projected warranty expense is placed in 04, but the resulting economic benefits are placed in 05, which is obviously not in line with the accrual principle. As a result, an alternative approach to accounting for income taxes is proposed.
(2) For the taxable amount to be adjusted, and then arrive at the income tax expense
For example, in the above example, the taxable amount of 3,960,000 yuan in '04 is included in the income statement as income tax expense, which does not comply with the principle of the accrual system, as shown in the expected income tax impact of warranty costs, the impact of the amount of 2,000 × 33% = 660,000 yuan, the reasonable approach, that is, the 660,000 yuan of future benefits from the taxable amount, and treat 396-66=3.3 million dollars as income tax expense in '04. Here we call the $660,000 deferred income tax.
After the introduction of the concept of deferred income tax, the amount of income tax payable in tax law is not equal to the accounting income tax expense, the relationship between the two is expressed in the formula:
Income tax expense = income tax payable - deferred income tax.
Of course, our example here is to subtract the deferred income tax from the income tax payable to arrive at the income tax expense. In practice, the opposite will occur, and when it does, the deferred income tax will be added to the income tax payable. Thus, the above formula becomes:
Income tax expense = income tax payable ± deferred income tax