03-01-2006, 06:25 PM
<blockquote id="quote"><font size="1" face="Verdana, Tahoma, Arial" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by mhn786</i>
<br />Hi All,
Can please any one explain explain what is current Tax & Deffered Tax.
and what is there treatment
Thanks
MHN
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
It is detailed discussion, however, deferred tax arises due to temporary differense(s) b/w accounting profit and taxable profit, and to ensure the comparability of financial statements deferred tax is created. Illustration will help u to understand the ensurance of comparabilty.
(Figures in rupees)
Cost of asset is 10,000
Useful life is 5 yrs
RV is zero
Method of depreciation is SL
Tax depreciation as per tax laws is 4,000 in 1st year, 3,000 in 2nd year, 2,000 in 3rd year and 1,000 in 4th year.
Accounting profit is constant i.e 10,000 per annum.
Tax rate is 40%
Now look
In 1st year
If we add back acc dep and deduct tax dep for calculating current tax, the perofit will be 8,000(10,000+2,000-4,000) and after tax profit is 4,800
2nd year
restated profit for tax puposes is 9,000(10,000+2,000-3,000) and after tax profit is 5,400.
3rd year
restated profit for tax puposes is 10,000 (10,000+2,000-2,000)
4th year
restated profit for tax puposes is 11,000 (10,000+2,000-1,000)
5th year
restated profit for tax puposes is 12,000(10,000+2,000+0)
Now the question arises in the mind of investor that why does the graph of net profit after tax fall and then rise (becz of reversal) keeping in view the constant performance of the company?
So, to keep in line the profit of the company with the actual performance, deferred tax arises and it is reversed as and when the effect of temporary difference(s) reverses.
Hope it will help u a bit.
ICAPians, the unaparalleled..
<br />Hi All,
Can please any one explain explain what is current Tax & Deffered Tax.
and what is there treatment
Thanks
MHN
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
It is detailed discussion, however, deferred tax arises due to temporary differense(s) b/w accounting profit and taxable profit, and to ensure the comparability of financial statements deferred tax is created. Illustration will help u to understand the ensurance of comparabilty.
(Figures in rupees)
Cost of asset is 10,000
Useful life is 5 yrs
RV is zero
Method of depreciation is SL
Tax depreciation as per tax laws is 4,000 in 1st year, 3,000 in 2nd year, 2,000 in 3rd year and 1,000 in 4th year.
Accounting profit is constant i.e 10,000 per annum.
Tax rate is 40%
Now look
In 1st year
If we add back acc dep and deduct tax dep for calculating current tax, the perofit will be 8,000(10,000+2,000-4,000) and after tax profit is 4,800
2nd year
restated profit for tax puposes is 9,000(10,000+2,000-3,000) and after tax profit is 5,400.
3rd year
restated profit for tax puposes is 10,000 (10,000+2,000-2,000)
4th year
restated profit for tax puposes is 11,000 (10,000+2,000-1,000)
5th year
restated profit for tax puposes is 12,000(10,000+2,000+0)
Now the question arises in the mind of investor that why does the graph of net profit after tax fall and then rise (becz of reversal) keeping in view the constant performance of the company?
So, to keep in line the profit of the company with the actual performance, deferred tax arises and it is reversed as and when the effect of temporary difference(s) reverses.
Hope it will help u a bit.
ICAPians, the unaparalleled..
