Tax Accounting Lecture No. 1 PDF

Dr. Mohamed Eliwa  Legal persons: (business entities)The tax rate on these firms is 22.5% Are industrial or commercial companies such as: Partnerships. Limited liability companies. Joint stock companies. ➔Legal persons are required to adopt the Egyptian Accounting Standards and to k...

Dr. Mohamed Eliwa  Legal persons: (business entities)The tax rate on these firms is 22.5% Are industrial or commercial companies such as: Partnerships. Limited liability companies. Joint stock companies. ➔Legal persons are required to adopt the Egyptian Accounting Standards and to keep regular accounting books.  The accounting profits refer to the result of matching revenues against expenses in the income statement, where both revenues and expenses are measured in accordance with the generally accepted accounting principles or the Egyptian Accounting Standards.  On the other hand, the taxable profit is measured in accordance with the tax laws, tax regulations, and the instructions of the Egyptian Tax Authority which state the bases for calculating of annual incomes and annual expenses.  So, the accounting profit as per the income statement has to be adjusted in order to match with the tax laws, tax regulations, and tax instructions.   Income statement or P. & L. a/c for year……… Expenses xxx Revenues xxx Net accounting profit xx xx xxx Therefore, the adjustments to the accounting profit can be briefly mentioned as follows:   Tax investigation (declaration) statement Addition Deduction Net accounting profit (as per income statement or p. & L. a/c) Profit (+) Or Loss (-) Add: 1) Expenses not approved by the tax department. XX (Overestimation of expenses). 2) Approved revenues not considered (not reordered) on XX determining accounting net profit. (Underestimation of revenues). Deduct: 1) Approved expenses not considered (not reordered) on XX determining accounting net profit. (Underestimation of expenses). 2) Revenues exempted by tax law. (Overestimation of XX revenues). Total additions & Total deductions xxx (xxx) Net Taxable Profit xxx  There are 4 classes of incomes that would be subject to tax: 1. the incomes from exercising of normal or usual commercial and industrial activities (gross profit) 2. the capital profits 3. the revaluation profits 4. the other incomes realized  the incomes from exercising of normal or usual commercial and industrial activities (gross profit)  These incomes are disclosed in the income statement for every financial year. as follows: Gross sales xxx - Sales returns & allowance (xx) - Cash sales discount (xx) Net sales ………………………………………………………………. xxx - Cost of goods sold: Inventory at first xxx + Cost of purchases: =  Gross purchases xx - Purchase returns & allowance (xx) - Cash purchase discount (xx) + Freight inward xx xxx Cost of goods available for sale xxx -Inventory at end (xxx) ∴ Cost of goods sold……………………………………………… (xxx) Gross profits…………………………………………………………… xxx  Understatement of gross sales by omitting some sales invoices.  Overstatement of sales returns & allowance.  Overstatement of gross purchases.  Understatement of purchase returns & allowances.  Overstatement of inventory at end.  Pricing of sales to related-party at prices that are lower than the normal selling prices to customers. A related party could be a husband, a wife, a son, a daughter, a brother, and could be an affiliate firm.  Pricing of drawings of owner at cost (purchase) price rather than at sale (market) price. ☺Note that: I M P O R T A N T  ➔ Inventory at end should include: 1. Goods on consignment to others. 2. Goods purchased but, in transit.  ➔ Inventory at end shouldn’t include: 1. Goods received on consignment from others. 2. Goods sold but not yet delivered. Assume that the income statement of a general partnership in Cairo has shown a net profit before taxes L.E.400000.  On examining the books & records of the company the tax commissioner found out the following:  1. Two sales invoice amounting to L.E. 100000 were not recorded in the sales journal.  2. Sales to a related-party, which is a cousin of a partner amounted to L.E.75000, but their normal value is L.E. 100000.  3. Purchases of L.E. 120000 were found to be overstated by a double recording of a purchase invoice of L.E. 17500.   4. Drawings of goods by a partner were recorded at cost price L.E.12000, the mark-up rate is 25% of sales.  5. The inventory at end includes goods received on consignment L.E. 10000.  6. Discounted allowed to customers L.E.1500 was not recorded in the books.  7. Inventory at end includes goods purchased but in transit, L.E. 20000.  Required: a. Make out adjustments to the accounting profits to find out the taxable profit for the partnership. b. Compute the tax due on the partnership.  Statement of tax adjustment for the partnership Details Net profit s. & deduction no addition Net profits as per income statement…………… 400000 1 Omitted sales invoices 100000 2 Difference of sales to related-party 25000 3 Double recording of purchase invoice 17500 4 Mark-up on partner's drawings 4000 5 Goods received on consignment 10000 6 Discount allowed not recorded 1500 Total net profit & additions………………… 546500 Total deductions (11500) Net taxable income……………………………………… 535000 →The tax due on the partnership for the ending financial year = L.E.535000 x 22.5% = L.E. 120,375.  1) The omission has reduced sales revenue and hence net Taxable income, so their amount is added to taxable income.  2) Sales to related-party must be at normal or fair price, so, the difference which is 100000 - 75000 = LE. 25000 is added to taxable income.  3) The double recording of the purchase invoice has increased cost of purchases, cost of goods available for sale, and cost of goods sold; consequently, it has reduced net profits, so it is added to taxable income. 4) Drawings should be recorded at sale price which is LE.12000 x 100/75=LE.16000, thus, LE. 16000 – 12000 = L.E.4000 is added to taxable income. 5) These goods must not be included in cost of inventory at end, thus, it is deducted from taxable income. 6) The discount allowed not recorded by the firm is deducted as it is admitted by the Tax Department With my best wishes