Tax Accounting Lecture 1: Legal Persons Taxation

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Questions and Answers

What is the tax rate applied to legal persons such as partnerships and joint stock companies?

20%

22.5% (correct)

30%

25%

Which accounting standards must legal persons adopt?

Global Accounting Standards

United States Generally Accepted Accounting Principles

International Financial Reporting Standards

Egyptian Accounting Standards (correct)

What is the primary difference between accounting profits and taxable profits?

Accounting profits are calculated by cash flow while taxable profits are based on bank statements.

Taxable profits are always lower than accounting profits due to tax exemptions.

Taxable profits are determined according to tax laws, while accounting profits are based on accounting principles. (correct)

Accounting profits include future income, while taxable profits only include current income.

Which of the following best describes adjustments made to accounting profit for tax purposes?

They adjust both revenues and expenses to comply with tax regulations. Signup and view all the answers

What type of income is NOT mentioned as being subject to tax?

Income from capital investments Signup and view all the answers

Which of the following adjustments would lead to an increase in taxable profit?

Approved revenues not considered Signup and view all the answers

Which of these is NOT a necessary component in the tax investigation (declaration) statement?

Expected future income Signup and view all the answers

What should be included in the inventory at end?

Goods on consignment to others. Signup and view all the answers

Which of the following is a possible cause for an understatement of gross sales?

Overstatement of sales returns & allowance. Signup and view all the answers

What would be classified as an addition in the tax calculation adjustments?

Expenses not approved by the tax department Signup and view all the answers

In the given scenario, what was the amount of unpaid related-party sales that understated the profit?

L.E. 75000 Signup and view all the answers

What was the amount by which the purchases were overstated due to double recording?

L.E. 17500 Signup and view all the answers

What impact does pricing of sales to related parties at lower than normal prices have?

Decreases net profit. Signup and view all the answers

Which of the following is NOT included in the inventory at end?

Goods sold but not yet delivered. Signup and view all the answers

What is a common issue related to sales returns and allowances that can affect gross profit?

Overstatement. Signup and view all the answers

What should be the normal practice for determining the pricing of owner's drawings?

At market price. Signup and view all the answers

What is the net taxable income calculated for the partnership?

L.E. 535,000 Signup and view all the answers

Which amount was not recorded in the books and therefore required an addition to taxable income?

Discount allowed to customers Signup and view all the answers

What is the tax due on the partnership for the ending financial year?

L.E. 120,375 Signup and view all the answers

Which of the following influences the taxable income positively because it reduces reported net profits?

Double recording of purchase invoice Signup and view all the answers

What mark-up rate was used to calculate the drawings by a partner?

25% Signup and view all the answers

Which item must be deducted from the taxable income at the end of the financial year?

Discount allowed not recorded Signup and view all the answers

How much is the adjustment made for the mark-up on the partner's drawings?

L.E. 4,000 Signup and view all the answers

What amount represents the difference of sales to related-party that is added to the taxable income?

L.E. 25,000 Signup and view all the answers

Study Notes

Tax Accounting Lecture 1: Commercial & Industrial Profits Tax on Legal Persons

Legal persons (business entities) are taxed at 22.5%
Examples of legal persons include partnerships, limited liability companies, and joint stock companies
Legal persons must follow Egyptian Accounting Standards and maintain proper accounting records

Accounting Profit & Taxable Profit

Accounting profit is calculated by matching revenues and expenses based on generally accepted accounting principles (Egyptian Accounting Standards).
Taxable profit is determined according to tax laws, regulations, and instructions provided by the Egyptian Tax Authority.
Taxable profit requires adjusting the accounting profit to align with tax rules.

Tax Investigation (Declaration) Statement

The statement adjusts the net accounting profit to arrive at the net taxable profit.
Additions include expenses not approved by the tax department and approved revenues not considered in net profit calculations.
Deductions include approved expenses not considered in net profit calculations and revenues exempted by tax law.

Legal Persons' Incomes Subject to Tax

There are four categories of income subject to tax:
- Income from normal or usual commercial and industrial activities (gross profit)
- Capital profits
- Revaluation profits
- Other realized incomes

Incomes from Commercial and Industrial Activities (Gross Profit)

Gross profit from commercial and industrial activity is disclosed in the income statement for each financial year.
Calculating gross profit involves:
- Gross sales
- Sales returns & allowance
- Cash sales discount
- Cost of goods sold (calculated from inventory):
  - Beginning inventory
  - Purchases = Goods available for sale
  - Ending inventory = Cost of goods sold
- Gross profit

Inventory at End Notes - Tax Law

Important inventory at end information:
- Goods on consignment to others should be included
- Goods purchased, but in transit, should be included
- Goods received on consignment from others
- Goods sold, but not yet delivered should not be included

Example (Partnership Income Statement)

A partnership's income statement shows a net profit before tax of LE 400,000.
Tax commissioner analysis found errors/omissions requiring adjustments:
- Two sales invoices totaling LE 100,000 were not recorded.
- Sales to a related party (LE 75,000) with a normal value of LE 100,000.
- Purchases of LE 120,000 were overstated due to double recording of a LE 17,500 purchase invoice.
- Partner drawings recorded at cost (LE12,000, with a 25% mark-up rate).
- Inventory at end includes goods received on consignment (LE 10,000)
- Discounted sales not recorded (LE 1,500)
- Inventory at end includes goods purchased but in transit (LE 20,000)

Adjustments and Tax Calculation Example

Calculations determined adjustments to the accounting profit to arrive at the taxable profit, LE 535,000 and the tax due, LE 120,375

Explanations

Explanations of the adjustments made to find the final taxable income for the partnership.

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Description

Explore the fundamental concepts of tax accounting as it pertains to legal persons, including the tax rates and accounting standards in Egypt. This lecture discusses the differences between accounting profit and taxable profit, along with the tax investigation statement that adjusts accounting profit. Gain insights into ensuring compliance with the Egyptian Tax Authority requirements.