国际学院毕业论文英文格式规范(2)

2. General methods of accounting for income tax

2.1 Income statement liability vs. balance sheet liability method

2.1.1 Income statement liability method

Income statement liability method is the analysis of different timing of recognition for revenues and expenses due to the differences between accounting standards and tax law, that the analysis of timing differences. Timing differences are differences between taxable profit and accounting profit that originate in one period and reverse in one or more subsequent periods. Accounting profit is net profit or loss for a period before deducting tax expense. Taxable profit is the profit for a period, determined in accordance with the rules established by the taxation authorities, upon which income

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江西财经大学普通本科毕业论文

taxes are payable. Timing differences analyze the differences between taxable profit and accounting profit from the perspective of income statement items and reflect the differences that appear in that period. Income statement liability method can only identify timing differences.

Timing differences emphasize on the influence on current tax caused by the origination and reversion of differences. Income statement liability method focuses on the past and present and can’t directly reflect the effects on the future. It places emphasis on matching revenues and expenses. Under income statement liability method, the items of income statement are recognized directly while items of balance sheet are recognized indirectly. In such situation, tax expense is calculated first, the formula is as follows: tax expense=accounting profit*tax rate. Then the deferred tax is calculated based on the differences between tax expense and current tax. Current tax is the amount of income taxes payable in respect of the taxable profit for a period.

2.1.2 Balance sheet liability method

Balance sheet liability method is the analysis of temporary differences, which are differences between the tax base of an asset or liability and its carrying amount in the balance sheet. Temporary differences analyze the differences between taxable profit and accounting profit from the perspective of income statement items and reflect the differences that appear in that time point. Balance sheet liability method can not only recognize timing differences but also other temporary differences. Because all timing differences are temporary differences, but there are some temporary differences which are not timing differences.

Temporary differences emphasize on the influence on the ending balance of assets and liabilities and the content of the differences and we can directly calculate deferred tax assets and deferred tax liabilities. Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:(a) deductible temporary

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江西财经大学普通本科毕业论文

differences;(b) the carry forward of unused tax losses; and(c) the carry forward of unused tax credits. Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences. Balance sheet liability method focuses on present and future. Under balance sheet liability method, the items of balance sheet are recognized directly while the items of income statement are recognized indirectly. Deferred tax assets and deferred tax liabilities on balance sheet date are calculated first and then we calculate tax expenses. The formula is as follows: tax expense= current tax + (ending balance of deferred tax liabilities –beginning balance of deferred tax liabilities) – (ending balance of deferred tax assets- beginning balance of deferred tax liabilities).So the tax expense is the aggregate amount included in the determination of net profit or loss for the period in respect of current tax and deferred tax.

2.2 The adoption of balance sheet liability method

2.2.1 The strengths of balance sheet liability method

Compared to the income statement liability method, the balance sheet liability method better serves the needs of more relevant and reliable accounting information, which provides the following strengths:

1. Improve the relevance of accounting information

According to the balance sheet liability method, the deductible temporary differences and the taxable temporary differences would be recognized as deferred tax assets and deferred tax liabilities respectively. They are the essential items that comprise the balance sheet. Such accounting treatment can thoroughly reflect the inflow and outflow of cash in the future because of the temporary differences on the balance sheet date. Therefore, the information user can better judge the financial position and predict the future cash flow.

2. Provide more reliable and sufficient income tax accounting information

As mentioned above, the balance sheet liability method focuses on temporary

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江西财经大学普通本科毕业论文

differences, which includes all the timing differences and other temporary differences. Temporary differences arise in the following circumstances, which do not give rise to timing differences:

(a) Subsidiaries, associates or joint ventures have not distributed their entire profits to the parent or investor

(b) Assets are revalued and no equivalent adjustment is made for tax purposes; and

(c) The cost of a business combination that is an acquisition is allocated to the identifiable assets and liabilities acquired, by reference to their fair values but no equivalent adjustment is made for tax purposes.

Furthermore, there are some temporary differences which are not timing differences, for example those temporary differences that arise when:

(a) The non-monetary assets and liabilities of a foreign operation that is integral to the operations of the reporting entity are translated at historical exchange rates;

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