INCOME TAXES EXAM WITH ANS 2024 LATEST VERSION
1. Describe the differences between accounting profit and taxable income and define
key terms, including deferred tax assets, deferred tax liabilities, valuation allowance,
tax payable, and income tax expense.
Definition of Accounting Profit
Accounting Profit is the result of operating and non-operating activities of the company. It is the
actual financial gain obtained after reducing total expenses from total revenue of the business. It
reflects the company’s profitability and performance in the future. It also determines that how
accurately the resources of the entity are allocated.
For knowing the company’s liquidity and solvency, accounting profit is very helpful to the users
of the financial statement.
The financial year starts from 1st day of April and ends on the 31st day of March.
, Definition of Taxable Profit
The amount of profit which is taxable as per the Income Tax Act, 1961 under the head Profit and
Gains from Business or Profession, is known as taxable profit. It is derived by taking accounting
profit as a base. Every year the return is furnished to the income tax department for the previous
year in the assessment year. On the basis of this return the taxable profit and the tax thereof is
calculated which is to be paid by the company. In this profit, disallowed expenses are added
back.
For Example – If the Assessment Year is 2015-2016, then the Previous Year will be 2014-2015.
DEFERRED TAX ASSETS
A deferred tax asset is an item on a company's balance sheet that reduces its taxable income in
the future.
Such a line item asset can be found when a business overpays its taxes. This money will
eventually be returned to the business in the form of tax relief. Therefore, the overpayment
becomes an asset to the company.
A deferred tax asset is the opposite of a deferred tax liability, which indicates an expected
increase in the amount of income tax owed by a company.
DEFERRED TAX LIABILITIES
A deferred tax liability is a listing on a company's balance sheet that records taxes that are owed
but are not due to be paid until a future date.
The liability is deferred due to a difference in timing between when the tax was accrued and
when it is due to be paid. For example, it might reflect a taxable transaction such as
an installment sale that took place one a certain date but the taxes will not be due until a later
date.
VALUATION ALLOWANCE
A valuation allowance is a reserve that is used to offset the amount of a deferred tax asset.
The amount of the allowance is based on that portion of the tax asset for which it is more
likely than not that a tax benefit will not be realized by the reporting entity.
TAX PAYABLE
Taxes payable refers to one or more liability accounts that contain the current balance of
taxes owed to government entities. Once these taxes are paid, they are removed from the
taxes payable account with a debit. Many taxes payable are paid within a short period of
time, and so do not remain on an organization’s balance sheet for long.
1. Describe the differences between accounting profit and taxable income and define
key terms, including deferred tax assets, deferred tax liabilities, valuation allowance,
tax payable, and income tax expense.
Definition of Accounting Profit
Accounting Profit is the result of operating and non-operating activities of the company. It is the
actual financial gain obtained after reducing total expenses from total revenue of the business. It
reflects the company’s profitability and performance in the future. It also determines that how
accurately the resources of the entity are allocated.
For knowing the company’s liquidity and solvency, accounting profit is very helpful to the users
of the financial statement.
The financial year starts from 1st day of April and ends on the 31st day of March.
, Definition of Taxable Profit
The amount of profit which is taxable as per the Income Tax Act, 1961 under the head Profit and
Gains from Business or Profession, is known as taxable profit. It is derived by taking accounting
profit as a base. Every year the return is furnished to the income tax department for the previous
year in the assessment year. On the basis of this return the taxable profit and the tax thereof is
calculated which is to be paid by the company. In this profit, disallowed expenses are added
back.
For Example – If the Assessment Year is 2015-2016, then the Previous Year will be 2014-2015.
DEFERRED TAX ASSETS
A deferred tax asset is an item on a company's balance sheet that reduces its taxable income in
the future.
Such a line item asset can be found when a business overpays its taxes. This money will
eventually be returned to the business in the form of tax relief. Therefore, the overpayment
becomes an asset to the company.
A deferred tax asset is the opposite of a deferred tax liability, which indicates an expected
increase in the amount of income tax owed by a company.
DEFERRED TAX LIABILITIES
A deferred tax liability is a listing on a company's balance sheet that records taxes that are owed
but are not due to be paid until a future date.
The liability is deferred due to a difference in timing between when the tax was accrued and
when it is due to be paid. For example, it might reflect a taxable transaction such as
an installment sale that took place one a certain date but the taxes will not be due until a later
date.
VALUATION ALLOWANCE
A valuation allowance is a reserve that is used to offset the amount of a deferred tax asset.
The amount of the allowance is based on that portion of the tax asset for which it is more
likely than not that a tax benefit will not be realized by the reporting entity.
TAX PAYABLE
Taxes payable refers to one or more liability accounts that contain the current balance of
taxes owed to government entities. Once these taxes are paid, they are removed from the
taxes payable account with a debit. Many taxes payable are paid within a short period of
time, and so do not remain on an organization’s balance sheet for long.
