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About this lesson
Understand the differences between Accounting and Tax treatments.
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Tax Part 2
When to use
When constructing a basic Financial Model
- In this example, the $100 non-current asset in question has both an economic life and a tax life of four years
- For accounting purposes, depreciation is calculated on a straight-line basis of 25% p.a. For tax purposes, I am assuming a double declining balance method, which would be 50% of the remaining balance. Assuming the asset is disposed of at the end of four years, the final year’s tax balance is written down to zero
- If we compare the differences between Accounting and Tax In the first year, more depreciation may be claimed for the tax calculation than under the comparable accounting calculation. This will lead to a lower taxable profit, meaning less tax to pay
- The tax effect shows what the benefit is worth – measurements of worth are shown in the Balance Sheet at their tax effected (i.e. after tax) amounts. If we receive a benefit of $7.50 now and the differences eventually sum to zero, in the future we will have to pay $7.50 more than accounting forecasts will show. Since it is in the future, this will be a tax deferred liability.
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