Accounting For Income Taxes Research Essay Help

Table of Contents
Introduction Body Conclusion Bibliography

Introduction

In tax accounting, taxable income refers to the amount used to determine the amount of income tax due. According to the Internal Revenue Code, taxable income is established. The modified cash basis and cash availability concept established by the Code distinguish tax accounting. Arnett explains the rationale behind cash basis tax accounting: "Pay the tax when you have the ability to pay (cash)," despite the fact that, by any logical understanding of the term, income has been realized in some cases but not in others (Weygandt, 2005).

Main body

The objective of depreciation accounting is to allocate the cost or other fundamental value of tangible capital assets, minus salvage, across their expected useful life. The objective of selecting the optimal technique is to allocate costs in a manner that approximates the rate at which the service utility of the asset is being utilized (Weygandt, 2005). In contrast, the purpose of the taxation policy is to promote economic growth through stimulating investment. Weygandt believes that the goal of allowing accelerated depreciation deductions for tax reasons is to encourage investment in new capital equipment, not to better align expenses and revenues (Weygandt, 2005).

The profitability of a company is measured by its income. As a measure of capital preservation, stock holders and investors frequently rely on a company's income as its current market worth (Epstein B.J. et. al., 1999). Similar to management, equity investors have similar disclosure requirements. They need the income information to evaluate the directors' performance, the company's solvency, the earning power, the financial situation of the organization at the conclusion of the term, the directors' stewardship, and if the company's money have been handled ethically.

Shareholders must decide whether to retain, purchase, or sell their shares. Their choice is based on their evaluation of the organization's related risk. As a type of compensation, companies pay equity investors rewards (dividends and share price appreciation). Despite these benefits, investors frequently equate risk with the reported financial success and income level. A strong earnings level and reported profit are sometimes viewed as an indicator of a strong share price increase.

Strong earnings and income data within a given period are typically accompanied by above-average stock market valuations (Whittred G. et. al., 2000). Investors use income as a forecasting tool to manage their limited resources because they believe reported income affects the future value of shares. Various accounting strategies can alter income determination. The preferences between various methodologies for determining a person's income rely on the objectives of income users and income uses. Therefore, users with a vested interest in the organization benefit from income data.

The fundamental objective of manipulating accounting income is to lower a company's tax liability. Manipulating accounting income will result in either a positive or negative income level. (Farrell, 2001) In order to achieve organizational objectives, management, owners, and creditors seek a healthy accounting profit. A negative reaction to income focuses primarily on tax liabilities.

The concept of all-inclusive income limits the discretion of management in highlighting future maintainable earnings. This difficulty is accommodated by the classification of extraordinary and unusual goods. Under the standard, abnormal items (items of revenue and expense that are considered abnormal by reason of their size and effect on operating profit or loss after income tax) and extraordinary items (items of revenue and expense that are attributable to transactions outside the ordinary operations of the company and are not recurring in nature) should be disclosed as a separate amount. The distinction between extraordinary and abnormal items will allow users to make more informed decisions regarding the company's future earnings capabilities.

The cash basis method of accounting is fairly straightforward, as it is typically clear when cash is received from a client or other payer, or when cash, a credit card, or a cheque is used to pay an expense. The incoming and outgoing cash flow is recorded and recognized for tax reasons. The cash basis method of accounting is fairly straightforward, as it is typically clear when cash is received from a client or other payer, or when cash, a credit card, or a cheque is used to pay an expense.

The incoming and outgoing cash flow is recorded and recognized for tax reasons. Under the cash method, income is recorded when it is received, whether physically or constructively. When money is made available to you without limitation, posted to your account, or received by your agent, this is constructive receipt. This rule often applies to monies paid to secure a loan, including prepaid interest, points, and loan origination fees, which must typically be subtracted throughout the life of the loan.

The legislative, executive, and judicial branches of government all contribute to the creation, interpretation, and resolution of tax statutes. Included in the purposes of modern tax statutes are revenue requirements, economic, social, fairness, and political considerations. Lastly, tax accounting has its controversies, but the objective of financial accounting associations should be to assist Congress and the Internal Revenue Service in achieving their goals in a way that results in the most fair and equitable taxation of taxpaying units, whether they are individuals or businesses.

Financial accounting, management accounting, and tax accounting are the most extensively utilized types of accounting information in the business world. Financial accounting is the description of an economic entity's financial resources, obligations, equity, and operations. Management accounting entails information provided expressly to assist managers in running a successful organization. Despite the fact that management accounting information occasionally includes non-financial aspects, it remains a significant type of accounting information. Accounting for taxes is the process of preparing income tax returns.

Tax returns are strictly based on financial accounting data. The difficult aspect is not the drafting of the tax return, but rather Tax Planning. Tax planning entails anticipating the tax ramifications of corporate transactions and structuring these operations to properly reduce the income tax burden.

Accounting in the real world is a requirement in the same way that water and food are required for survival. If there were no accounting in the world, nearly everyone's financial records would be extremely disorganized, and they would have great difficulty keeping track of their Assets and Liabilities. Accounting gives our life structure. A company can conduct business forecasting with accounting data in order to obtain timely, accurate, and valuable information for future business choices. (2002) (Barton)

Lastly, accounting is necessary for tax settlement. A business must file a monthly tax report to the tax department and plan for tax payment. They are required to pay income tax and other government-mandated taxes. They must communicate often with the local tax department to reach an understanding on tax computation, tax settlement, and the documentation of company activities.

The best way to lower a company's tax liability is to reduce its earnings by spending the money. This money is actually a prepayment for the primary expense, which will not be incurred until the following year. But it is spent on other things, and the spending is out of control because there is so much money available. When the primary bill arrives in about a year, there is little or no money left over from the project to pay for it. The only option is to use funds from new initiatives to cover the expenses of older ones. It appears the corporation has generated a substantial profit. But as time passes and yearly cash shortfalls develop, it becomes increasingly difficult to pay for important expenses.

In such a scenario, the business may slow and no new positions may be created. (Parker, 2000) Consequently, the only thing left are a multitude of outstanding invoices. In accordance with the cash basis accounting system, unpaid expenses are not recognized in the financial statements. Therefore, the financial statement will reflect the company's profitability rather than its insolvency.

Conclusion

Tax statements made on a cash foundation of accounting may have negative impacts not only on the operation of a corporation by managers who are internal users, but also on external users like investors and creditors. Profitability is the capacity of a business to generate income.

The most significant indicator of profitability is net income. Numerous stakeholders, including investors, management, government tax agencies, creditors, and labor unions, require accounting information to make educated decisions. The primary function of accounting information is to facilitate decision-making and is frequently referred to as a means to an end. Regular accounting information is necessary for stakeholders and investors to monitor the company's success.

The income statement is a report that details the revenue, costs, and net income at the end of a period for a business. The income statement illustrates the company's past performance and profitability.

References

2002; Australia; Barton A.D.; "Objectives and Basic Concepts of Accounting"; Australian Accounting Research Foundation;

Epstein B.J. and A.A. Mirza; "Interpretation and Application of International Accounting Standards 1999"; Wiley; United States of America.

Select Readings in Accounting Theory; University of Technology, Sydney; 2001; Sydney.

Accounting Handbook 2000 by Parker C.; Prentice Hall; Australia.

Weygandt, J., Kieso, D., and Kimmel, P. (2005). Statistical Accounting (5th ed.). 22-25, 110-14. Hoboken, NJ: John Wiley & Sons, Inc.

Financial Accounting Incentive Effects and Economic Consequences; Whittred G, Zimmer I, Taylor S; Harcourt; 2000; Australia.

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