Visualizing the Accounting Concepts in Accounting for Income Taxes

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Abstract

The main purpose of this teaching note is to enable students to develop a conceptual understanding of accounting for income taxes. The accounting for income taxes is covered in the second half of Intermediate Accounting when most students have not taken the advanced tax course on book-tax differences. Therefore, the students usually have difficulty understanding the various concepts in accounting for income tax, especially with respect to the book-tax temporary differences. This teaching note helps students in Intermediate Accounting course to visualize the reverse of temporary differences, the concepts of deferred tax asset or liability, deferred tax expense or benefit, the computation of income tax expense, and the financial reporting of disclosure requirements.

Using a single exhibit, this teaching note illustrates the following concepts: (1) what is the reverse of book-tax temporary difference, (2) why deferred tax is defined as deferred tax asset instead of deferred tax liability and vice versa, (3) what is deferred tax expense or deferred tax benefit, (4) how to compute income tax expense using balance-sheet approach, and (5) how to report the income tax information on the income statement and balance sheet.

Author

• Chan Du, University of Massachusetts-Dartmouth