AS 22 ACCOUNTING FOR TAXES ON INCOME PAR T 1

Introduction

This tutorial provides a comprehensive guide on AS 22 Accounting for Taxes on Income, specifically focusing on the key concepts and practical applications. Understanding AS 22 is crucial for accountants and financial professionals, as it outlines the principles for accounting for income taxes and ensures compliance with regulatory requirements.

Step 1: Understand the Objective of AS 22

• AS 22 aims to prescribe the accounting treatment for income taxes in financial statements.
• It ensures that the tax expense recognized in the financial statements aligns with the actual tax liability.
• Familiarize yourself with the terminology such as "deferred tax assets" and "deferred tax liabilities."

Step 2: Recognize Current and Deferred Tax

• Current tax refers to the amount of income tax payable or recoverable for the current period.
• Deferred tax arises from timing differences between the recognition of income and expenses for tax purposes and their recognition in financial statements.
• Understand the key components:
  • Deferred Tax Asset: Occurs when taxes paid exceed tax expense recognized.
  • Deferred Tax Liability: Arises when tax expense exceeds taxes paid.

Step 3: Identify Temporary Differences

• Temporary differences are differences between the carrying amount of assets and liabilities in the balance sheet and their tax bases.
• Examples include:
  • Depreciation methods (e.g., straight-line vs. declining balance)
  • Provisions for expenses that are deductible in future periods.
• Keep track of these differences to properly account for deferred tax.

Step 4: Calculate Current Tax

• Calculate current tax based on the taxable income of the firm.
• Identify the applicable tax rates in your jurisdiction.
• Use the formula:
  • Current Tax = Taxable Income × Tax Rate

Step 5: Calculate Deferred Tax

• Determine the deferred tax by calculating the impact of temporary differences:
  • For a Deferred Tax Asset:
    • Deferred Tax Asset = Temporary Difference × Tax Rate
  • For a Deferred Tax Liability:
    • Deferred Tax Liability = Temporary Difference × Tax Rate
• Ensure that all calculations reflect the tax rates expected to apply when the temporary differences reverse.

Step 6: Journal Entries for Tax Accounting

• Record the tax expense in the financial statements with the following journal entries:
  • For current tax:

    Debit: Tax Expense
    Credit: Current Tax Payable
    

  • For deferred tax:

    Debit: Deferred Tax Asset / Credit: Deferred Tax Liability
    

Step 7: Disclosure Requirements

• Ensure compliance with the disclosure requirements of AS 22:
  • Present the current and deferred tax assets and liabilities separately in the balance sheet.
  • Disclose the components of the tax expense in the notes to the financial statements.
  • Detail the nature of temporary differences and the tax rates used for calculations.

Conclusion

Understanding AS 22 is vital for maintaining accurate financial records and ensuring compliance with accounting standards. By following the steps outlined in this tutorial, you'll be better equipped to account for income taxes effectively. As a next step, consider reviewing specific case studies or examples to see AS 22 applied in real-world scenarios.