Understanding Tax Expense and Current Tax - CPA FR M4 - Part A

The module on income taxes is challenging and requires significant time and effort to master.

The difference between accounting profit and tax profit needs to be accounted for and reconciled.

There are expenses that are not tax deductible, leading to differences in taxable profit compared to accounting profit.

💡 The video discusses the importance of reconciling accounting profit and taxable profit to determine the correct tax expense.

📚 Part A of the video focuses on understanding current tax, deferred tax, and the concept of recognition in tax accounting.

🔢 The video explains the formula for tax expense and highlights the difference between tax expense and tax income.

📚 Deferred tax assets are created through deductible temporary differences, unused tax losses, and carry forward of unused tax credits.

💰 Current tax liability is the amount owed and unpaid for previous and current periods, while deferred tax liability is the amount to be paid or satisfied in the future.

📈 Tax expense consists of current tax and deferred tax, and includes movements in deferred tax assets and liabilities.

📚 Accounting for current tax involves calculating the amount expected to be paid to the tax authorities and making adjustments based on tax laws.

💼 Creating separate sets of accounting books and tax books is a common practice, but there is a faster and easier way to determine tax profit by making adjustments to the income from an accounting perspective.

💰 The current tax expense and payable can be calculated by applying the tax rate to the tax profit, which is obtained through the reconciliation of accounting and tax figures.

💡 Temporary differences in assets like depreciation will eventually balance out, while non-temporary differences like entertainment expenses will always be different.

💼 Non-deductible fines and income recognized differently for accounting and tax purposes create permanent differences in tax expense.

📉 Higher tax depreciation reduces taxable profits and leads to lower tax payments, but may result in deferred tax liabilities in the future.

📝 Tax office forces recognition of $3,000 now, leading to more tax payment now but less in the future.

💰 Deferred tax asset (DTA) is created from temporary differences, resulting in less tax payment in the future.

📊 Adjusting accounting profit for tax purposes, deducting some expenses and adding non-deductible fines to increase taxable profit.

💰 Tax credit and tax loss can be considered as assets in future financial flows.

📉 Tax losses can offset gains, reducing the amount of tax owed.

💼 Current tax liabilities should be recognized and paid within the next twelve months.