In this topic 6 sections
Four amounts that answer different questions
Accounting profit reports income less expenses under accounting requirements. Taxable profit applies the tax rules stated in the case. Current tax measures the tax payable or recoverable for that taxable result. Cash paid is a settlement movement, which can relate to more than one reporting period. These amounts are connected, but they are not interchangeable.
Deferred tax adds the future tax consequences of recovering assets and settling liabilities. Profit-or-loss tax expense combines the current and deferred components allocated to profit or loss. Tax belonging to other comprehensive income (OCI), equity or a business combination needs its own allocation.
Use the Module 4 resource index to find the full set of downloads. The four-page tax reference keeps adjustment rules, a colour-coded tax-base lookup, formulas and journals together.
Identify the tax rule before adjusting profit
Start from profit before tax. Replace each accounting amount with the amount permitted by the stated tax rules. Do not assume that all tax uses cash accounting: a case can tax sales on accrual while allowing a particular provision only on payment.
| Item | Remove the accounting effect | Insert the tax effect |
|---|---|---|
| Expense with different timing | Add back the expense included in profit | Deduct the allowable tax deduction |
| Revenue with different timing | Subtract revenue included in profit | Add the amount assessable for tax |
| Expense never deductible | Add back the expense | No deduction, if the facts establish this treatment |
| Income exempt from tax | Subtract the income | No assessable amount, if genuinely exempt |
A permanent or non-temporary difference does not reverse into a later deduction or assessable amount. A timing difference generally does. However, deferred tax is ultimately a balance-sheet comparison, not simply a list of the current year's reconciliation adjustments. Revaluations and other events can create temporary differences without entering current accounting profit.
An entertainment expense is not universally non-deductible simply because of its name. Follow the case's tax assumption. The same caution applies to grants, dividends, foreign exchange movements and capital allowances.
An original current-tax reconciliation
Kestrel Studio reports profit before tax of $186,400. The case assumes a flat 30% tax rate. A $2,400 fine is never deductible and $4,800 of income is exempt. Equipment depreciation is $18,000 for accounting and $27,000 for tax. Warranty expense is $9,600, with $6,000 of deductible claims paid. Credit-loss expense is $2,000, while $800 of write-offs qualify for deduction.
Insurance expense is $6,000; the tax deduction is the $9,000 premium paid. Interest income is $5,000, of which $3,200 is received and taxable. Service revenue of $8,000 is recognised against $12,000 of advance receipts taxable on receipt. All these items are already included in accounting profit where relevant; no other adjustments apply.
| Reconciliation | Adjustment | Running total |
|---|---|---|
| Profit before tax | Starting point | 186,400 |
| Fine | +2,400 | 188,800 |
| Exempt income | -4,800 | 184,000 |
| Depreciation: add 18,000, deduct 27,000 | -9,000 | 175,000 |
| Warranty: add 9,600, deduct 6,000 | +3,600 | 178,600 |
| Credit losses: add 2,000, deduct 800 | +1,200 | 179,800 |
| Insurance: add 6,000, deduct 9,000 | -3,000 | 176,800 |
| Interest: subtract 5,000, add 3,200 | -1,800 | 175,000 |
| Advance receipts: subtract 8,000, add 12,000 | +4,000 | 179,000 |
Current tax is $179,000 × 30% = $53,700. The entry is Dr current tax expense $53,700; Cr current tax payable $53,700. All of this example's current tax belongs to profit or loss. The complete Kestrel workings connect this calculation to deferred tax and the financial statements later in the module.
Do not confuse the charge with the payable
If Kestrel opens with $11,000 of current tax payable and pays $48,000 during the year, closing payable is $11,000 + $53,700 - $48,000 = $16,700. The payment entry is Dr current tax payable $48,000; Cr cash $48,000. It does not record another tax expense. The tax expense to cash paid sheet provides the connected bridge from Module 2.
An overpayment can instead produce a current tax asset. A legally available loss carry-back can also create a current tax asset when it gives a recoverable amount for a prior period. A future loss carry-forward benefit is a different asset, discussed in the fourth topic.
Measure current tax using rates and laws enacted or substantively enacted by the reporting date. A proposed future rate that has not reached that threshold is not a substitute. Adjustments to estimates of tax for earlier periods should be identified rather than hidden inside a new taxable-profit calculation.
Direction checks for an open-book answer
If accounting depreciation exceeds the tax deduction, taxable profit rises relative to accounting profit. If tax depreciation exceeds accounting depreciation, taxable profit falls. A warranty expense not yet deductible is added back; a deductible payment is subtracted, even when the expense arose earlier.
For revenue, reverse the direction: remove accounting revenue, then insert taxable revenue. A deposit taxed now but earned later increases today's taxable profit and can create a future tax benefit. That benefit is assessed through the liability's tax base, not by recording a negative current tax payable.
Before finalising, check whether profit is before or after tax, whether amounts are current-year movements or closing balances, and whether an adjustment has already been included elsewhere. State all tax assumptions. A correct formula applied to an invented tax rule still produces an unsupported answer.
Sources and further reading
Concept sources: CPA Australia, Financial Reporting study guide, sixth edition (October 2022), Module 4, sections 4.1–4.2, printed pages 162–165. Original Kestrel Studio case and calculations.
Concept sources: AASB 112, June 2021 compilation, corresponding IAS 12 paragraphs 5, 12–14, 46, 58 and 61A. The supplied guide's issued-amendment basis is explained above.