Accounting for Taxation for early learners

About tax law

1. Royal Education Council -19-22 December 2019 Accounting for Taxation (Ch.1) Class XII Accountancy Teachers’ Orientation Programme Trashigang Middle Secondary School

2. Royal Education Council -19-22 December 2019 Learning Objectives On completion of this chapter learner should be able to:   explain the importance of taxation in business, discuss the statutory responsibilities of managers for tax accounting in business, differentiate between accounting profit and taxable profit, and illustrate how these differences arise, explain the concept of current tax expense and tax liabilities including under or over provision of taxes, explain the concept of deferred tax and make related accounting entries, and report tax components in the financial statements of the reporting entity.

3. Royal Education Council -19-22 December 2019 Why T ax Accounting? Tax is a legal responsibility of a management All domestic and international sales and purchases of goods/properties involve tax component unless exempted by tax regulations Management must maintain a proper records of all tax liabilities that is payable to the government and file tax returns on time Tax liabilities also include the personal income tax collected on behalf of the Government from employees’ salary and other remuneration income Business can do tax planning to achieve tax benefits

4. Royal Education Council -19-22 December 2019 Tax on S ale and Purchase of Goods Tax imposed on selling and purchase of goods is an indirect tax. Tax is an additional amount charged or paid on the purchase price of the goods or service. Sales tax is levied on both cash and credit sales. On 10 January ABC Company limited sold Nu. 200,000 of goods to a customer. 40% sales tax was levied. Record the sales transaction. Cash Dr 280,000 To Sales 200,000 To sales tax 80,000

5. Royal Education Council -19-22 December 2019 Tax on S ale and Purchase of Goods On 15 January ABC Company limited purchased Nu. 100,000 of goods. 40% sales tax was levied. Record the transaction. Purchases/Inventory Dr 100,000 Sales tax Dr 40,000 To cash 140,000 Sales tax payable to the Government is the net of sales tax collected and the sales tax paid to the supplier. i.e. 80,000 – 40,000 = Nu. 40,000

6. Royal Education Council – 19-22 December 2019 Tax on S ale and Purchase of Goods Sales tax returns must be filed by 10 February 2019 by using the ST Form VI. (sales tax returns are filed on 10 th of the following month) Enclosed cash/ cheque No............. date for Nu. ................ (Ngultrum...................................) only in payment of Sales Tax collected for the month of ......................... I/We declare that the information in this document and any attachments is true and correct to the best of my (our) knowledge and belief. In case the declaration is found to be untrue & incorrect, I/We shall be liable for fines, penalties & prosecution as per provisions of the Sales Tax, Customs & Excise Act, 2000.

7. Royal Education Council -19-22 December 2019 Accounting for Current Tax Business entities pay tax on the current year’s profit in the next accounting period. Statement of Income for the year ended 31 December 2018 Sales 1,000,000 Operating expenses (650,000) Operating profit 350,000 Tax (30%) (105,000) Profit after tax 245,000 Nu. 105,000 is a tax estimates which can be different from tax amount calculated by tax authorities later in Feb-March 2019. If tax authorities calculate tax amount as Nu. 165,000, the tax estimates is said to be under provision. Thus, an entity must recognize additional tax expense of Nu. 60,000 in 2019 in addition to tax expense on taxable income of 2019.

8. Royal Education Council -19-22 December 2019 Accounting for Current Tax Current tax is recorded as- 31 December 2018 Tax expense Dr 105,000 To current tax liability 105,000 31 December 2019 Tax expense Dr 60,000 To current tax liability 60,000 Tax expense Dr 200,000 To current tax liability 200,000 2018 tax expense recognized as 2019’s current tax. Assuming entity estimates Nu. 200,000 as tax expense for 2019

9. Royal Education Council - 19-22 December 2019 Tax expense for the year Accounting for Deferred Tax

10. Royal Education Council - 19-22 December 2019 Account Profit vs Taxable Income Accounting profit is the result of matching income (including accrued income) earned with expenses (including accrued income) incurred for the reporting period. Taxable income is the income of business assessed by Tax Authorities for tax purpose. Examples: 1) Bad debts : In accounting, bad debts are treated as expense and reduce profit for the year . However, tax regulations generally allow only up to Nu. 25,000 per debtor for deduction .

11. Royal Education Council - 19-22 December 2019 2) Inventory obsolescence : In accounting, management must assess the obsolescence of inventory or slow moving inventory and write it off to reduce profit for the year, whereas, tax regulations do not allow such deduction unless the inventory obsolescence was caused by unavoidable circumstances. Account Profit vs Taxable Income 3) Research and development: Tax regulations allow 2 percent of the assessed turnover of research and development cost for deductions. In accounting all research costs are expensed.

12. Royal Education Council - 19-22 December 2019 Accounting for Deferred Tax BAS12 requires entities to recognize deferred tax expense in statement of income and deferred tax liabilities in its statement of financial position when there is a taxable temporary difference between carrying amount and tax base of an asset or a liability. Tax base The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes . The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset. If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount.

13. Accounting for Deferred Tax Royal Education Council - 19-22 December 2019 SOCI –(Income – expenses=Profit/(loss) SOFP–(Assets – Liabilities=Equity/Net assets Current Tax Expense & Current Tax Liabilities ( T ax payable on current year’s taxable income) Deferred tax liabilities and Deferred Tax Assets (Future tax payable arising from assets or liabilities

14. Royal Education Council - 19-22 December 2019 Accounting for Deferred Tax ABC Company reported an operating profit of Nu. 600,000 for 2018 which includes an accrued income of Nu. 100,000. Tax rate 30%. Taxable income = 500,000 Accounting income = 600,000 Temporary difference of taxable income = 100,000 Tax on Nu. 100,000 will be levied when the income is received in the following accounting period. Tax expense for this TTD is recognized in 2018. Carrying amount of asset =100,000 Tax Base =0 TTD =100,000 What is the asset here? This is also called deferred tax income. DTE = 30% of 100,000 = Nu. 30,000

15. Royal Education Council - 19-22 December 2019 Accounting for Deferred Tax Tax expense Dr 150,000 To tax liability 150,000 Deferred tax expense Dr 30,000 To deferred tax liability 30,000 Statement of income for the year ended 31 December 2018 Operating profit 600,000 Taxation Current tax 150,000 Deferred tax 30,000 (180,000) Profit after tax 420,000

16. Royal Education Council - 19-22 December 2019 Accounting for Deferred Tax Statement of financial position as at 31 December 2018 Current Liabilities Deferred tax liability 30,000 Reported under CL because the income is expected to be received in the next accounting period. DTL arising from assets (e.g. PPE having longer useful life) will be reported under Non-current liabilities.

17. Royal Education Council - 19-22 December 2019 Accounting for Deferred Tax Statement of financial position of ABC Company as at 31 December 2018 Current assets Trading investments 104,000 Trade receivables 313,000 Inventories 152,000 Cash and cash equivalents 90,000 TOTAL ASSETS 1,509,000 ABC Company accounts for inventory obsolescence provision. New provision created in 2018 was Nu. 5, 400 (total provision: Nu. 9, 000). This provision is not tax deductible, as it is a general provision . Required: Calculate tax base for inventories and cash and cash equivalents.

18. Royal Education Council - 19-22 December 2019 Accounting for Deferred Tax Item Carrying amount Tax base Temporary difference Taxable / deductible DTL / DTA at 30% Inventories 152,000 161,000 -9,000 deductible 2,700 Cash and cash equivalents 90,000 90,000 TB > CA, this gives rise to deductible temporary difference and thus creates DTA. TB = CA, this has no deferred tax implication in future. Calculation of Tax Base CA = 152,000 Provision = 9,000 (provision is deducted for accounting income calculation BUT it is not allowed for deductions under Tax Regulations. Thus, TB =152,000 + 9,000 = Nu. 161,000 (in 2018)

19. Royal Education Council - 19-22 December 2019 ILLUSTRATION A Publications and Graphics Company (PGC) provides you the following information related to its taxation: Tax on the profit earned in 2018 was provided for at Nu. 74,000, and was settled on 1 April 2019 by payment of Nu. 79,000. Current tax on the profits earned in 2019 has been estimated at Nu. 84,000. The deferred tax account reported a balance of Nu. 28,000 as at 31 December 2018. As at 31 December 2019 the value of a non-current assets was Nu. 596,000, whereas the tax base was Nu. 456,000. The company pays tax at 25%.   Required: Explain the concept of deferred tax. Calculate the tax expense of the year 2019.

20. Royal Education Council - 19-22 December 2019 Accounting for Deferred Tax Under provision of previous year tax Tax estimates 74,000 Tax paid 79,000 5,000 Calculation of deferred tax Carrying amounof non current assets 596,000 Tax base 456,000 Taxable temporary difference 140,000 DTL (25%) 35,000 Deferred tax balance -28,000 additional DT required 7,000 Tax expense Under provision of previous year 5,000 Current year tax 84,000 Deferred tax 7,000 96,000

21. Royal Education Council - 19-22 December 2019 Accounting for Deferred Tax Current tax Deferred tax Tax expense for the year

22. Royal Education Council - 19-22 December 2019 Tax expense for the year Accounting for Deferred Tax

23. Royal Education Council - 19-22 December 2019 THANK YOU