Short Analysis of AS-22 w. r. t. Depreciation-
Deferred Tax is the tax effects of Timing Difference. The whole concept of deferred tax is depending on timing difference.
Accounting income (loss) is the net profit or loss for a period, as reported in the statement of profit and loss, before deducting income tax expense or adding income tax saving.
Taxable income (tax loss) is the amount of the income (loss) for a period, determined in accordance with the tax laws, based upon which income tax payable (recoverable) is determined.
As per AS-22 Timing differences are the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.
Example: – An asset is purchased of Rs.1,00,000/- having a useful life of 5 years and allowed 100% depreciation under Income Tax Act. Profit before depreciation is Rs.2,00,000/-.
Rs. 20,000/- (i.e. 100,000/5) is allowed as depreciation while computing the accounting income and Rs.1,00,000/- is allowed as full depreciation in the year of purchase while computing the taxable income.
Hence, Accounting Income is Rs.1,80,000/- (i.e. 2,00,000-20,000)
Taxable Income is Rs.1,00,000/- (i.e. 2,00,000-1,00,000)
Hence, the difference between Accounting Income and Taxable Income is created in this year and shall be created in a subsequent year (by the balance depreciation of Rs. 80,000=1,00,000-20,000) because in subsequent years, while computing the accounting income the entity shall deduct the depreciation of Rs. 20,000 but nil depreciation shall be allowed while computing the taxable income. This is called timing difference.