Accounting And Taxation For Income Statement

Closing Temporary Accounts

Discuss about the Accounting and Taxation for Income Statement.

As defined by various scholars, income statement is a part of annual accounting where the expenses are matched against the income to find out the bottom line of the company. During the preparation of accounting a cycle of the accounting practices are adopted.

The accounting information is reflected in periodical basis. The major steps in preparing the accounting statement are as following;

1. Analyzing of the information and recording transactions via journal entries
2. Posting journal entries to ledger accounts
3. Prepare unadjusted trial balance
4. After preparing adjusting entries
5. Adjusted trial balance has to be prepared
6. Financial Statements has to be prepared 

The time limit for carrying on net capital loss is none and thus keeping all records of any capital loss is essential as the setoff can be done at any moment of time as there is no time barring. The important aspects of records types are

1. Transfer or purchase receipts.
2. Market valuation details.
3. Details of Advertising cost, accountant, agent and legal person.
4. Details of rates and taxes of land and insurance costs.
5. Receipts of any transfer or purchase.
6. Borrowed money details for the said assets purchase along with interest on such borrowings.

The records must provide the flowing details—

1. Details of capital loss or capital gain calculation and the related event or transaction.
2. The happening date.
3. Transactions done by or details of parties.
4. Type of incident or transaction.

The basic motto to keep records is to guard all future requirements for saving an assesse from paying extra amount towards CGT. One good example is that a father has left a will for his son who gets some share in the will and plans to sale these shares. Now he needs all old records to determine the actual CGT to be calculated on this transaction. 

Tom Katzen
Tax Computation
	Amount $	Amount $
Income from Salary	85,000
Income from Capital Gain	18,000
Total Income		103,000
Less:
cost of a seminar	1,000
Depreciation of computers	700
Repairs of Equipment	560
Accounting Charge	540
Donation	300
		3,100
Taxable income		99,900
Less: Discount from Capital Gain	9000
Less: Rebate on health insurance	357.2
Taxable Total Income	90,543
Tax on Total Income	21,447.84
Less: Total tax withheld	15,500
Tax Payable	5,947.84

There are significant factors which are crucial in calculation of the tax liability of Tom Katzen who is a resident. The income derived from the sources in Australia and outside Australia would be taxable.  The person is also the owner of Sneak-a- Boo. The business is of selling new and second hand sneakers.

As an individual he has earned some income in the Accounting Year 2015-2016. The income is taxable. In the income year 2015-2016 he earned salary of $85,000 and also capital gain of $18,000. Tom Katzen has also earned franked dividend of $7,000 which had $1,000 and franking credits allocated.  The capital gain assessment is different issue. Some consideration has to be made before inclusion of the capital gain in taxable income head.

Capital Gain Tax in Australia is more or less related to making Capital gain by selling one’s home. The capital gain is exempted by 50% as per the Income Tax Assessment Act,1997 law in Australia but the law can be used for broader sense and usage also.

The Principle Place of Residence or PPR is the qualifying requirement for getting Capital Gain Tax or CGT Exemption.

A Capital gain or a capital loss is in short means that the amount that is realised on selling a capital asset and the amount thus received is the difference between the amount at which it was acquired and at which it was sold. The tax to be paid on such capital gain is called capital gain tax or CGT and it forms the part of income tax and thus assessed under Income Tax Assessment Act, 1997 (ATO, 2016).

These records will help to determine the exact CGT calculation. Although assets purchased prior to 20th September, 1985 is fully exempted from CGT , there is an exception to this which is that if any adjustments or improvements or any additions are made after 20th Sept, 1985 then it may be taxable under CGT under ITAA, 1997. Hence it is very important to keep track of CGT assets as date plays an important role in its treatment (Pwc, 2013). 

Tax Computation

The franking credit is the tax paid by the dividend paid by the Australian company to the Australian citizen is taxed under the system ‘imputation’. The tax paid by the company will be imputed towards the shareholders of the company. The tax paid by the company is attached as the franking credit with the dividend paid. The dividend received by the taxpayer is known as franking dividend. The important part of the calculation is to avoid franking credit and the franking dividend (Ato, 2016). 

As the definition of income statements suggest that all the incomes and the expenses are recorded and matched against each other. The revenues and other income are reduced by expenses. The expenses which are allowed to be matched against revenue should be business or business related expenses including raw materials or finished goods that are purchased to produce goods for sales. The heads of expenses are Salaries and Wages, Administrative expenses, Rent and Taxes and other expenses.

In the Balance Sheet, the assets and liabilities are recorded. The target of the business is to understand the assets and the liabilities situation. The assets and the liabilities are recorded that reflect the financial status of the company (Accountingexplained.com, 2016).

The income statement is the reflection of total income and of the total expenses. It helps to calculate the

Sneak-a- Boo
Statement of Income
	Amount $	Amount $
Cash Sales	315,000
Credit Sales	28,000
Insurance Proceeds	7,000
Insurance Proceeds: Storm	13,000
Bad Debts	1,000
Total Income		364,000
Payments
Cost of Sales	192,000
Council rates – business	6,000
Legal expenses in relation to the bank loan	2,000
Entertainment of suppliers and large customers	1,660
Repairs after storm damage to windows and carpets	12,000
Staff wages	80,000
Superannuation for staff	7,600
Advertising	27,000
Other deductible expenditure	10,000
Motor Vehicle Expenses	12,850
Total Expenses		351,110
Profit Out of Business		12,890
Cost of Sales
Opening Stock	16,000
Add: Purchase	195,000
Less: Closing Stock	19,000
Cost of Sales	192,000

The calculation of net income includes various factors. The loan receipts cannot be considered as income but Insurance proceeds can be recorded as income only if the actual cost of repairing the damaged part is lower than the insurance claim. Or there is another option to it, which says that actual income after the repair can be part of the income statement. As the accounts are being maintained as accrual basis, pre paid advertisement with an impact of more than one accounting year cannot be recorded in the income statement but it would be shown as the asset in balance sheet.

The Prepaid expenses once exhausted would be shown as the income otherwise the reflection would be in cash and adding the expenses as the asset.

The depreciation is allowable expenses and the depreciation value $12,800 to be deducted as expenses in Income Statement.

Based on the purchase data and the stock in trade data cost of goods sold is to be calculated and to be shown as the expenses in Income Statement.  

Statement of Income
	$	$
Fees received	450000
Interest on drawings	500
Interest on drawings	750
Total Income		451250
Less: Expenses
Rent of the training venue and sundry expenses	35000
Salary of part-time trainers	125000
Salary of Tom	35000
Salary of Claude	60000
Superannuation contributions for assistant	250
Bank loan repayments – interest	1500
Interest on capital – Tom	1000
Interest on capital – Claude	1000
Interest on loan from Claude	2500
Purchase of heart monitors	6000
Total Expenses		267250
Net Income		184000
Distribution of Income	$
Tom	92000
Claude	92000

The problem is clearly indicating the fact that the partnership is equal partnership. The interest paid to two partners is same. There are some expenses which are to be deducted from the income statement. The drawing can be considered as expenses as it would only be reduced from the capital account. The payment of principal amount is not allowable as deduction but the interest is allowable as deduction.

The following amounts for which there is no present entitlement;

Tom Katzen                 $10,000

James Katzen              $10,000

Scott Katzen                $4,000

Jennifer Katzen           $2,500

Oliver Katzen              $2,500

The above amount was set aside by the trustee based on his own discretion. The personal nature of expenses would be allowed to be paid by the trust but cash apportionment is not allowable as because, the trust profit cannot be distributed among the beneficiaries of the trust. The trust expenses are allowed to be paid to the discretion of the trustee but the trust deed shall have to have the mention of it and should be related to the object of the trust. 

References:

Accountingexplained.com, 2016. Accounting Cycle. [Online] Available at: https://accountingexplained.com/financial/cycle/ [Accessed 21 September 2016].

Ato, 2016. How dividends are taxed. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/Forms/You-and-your-shares-2013-14/?page=5 [Accessed 22 September 2016].

ATO, 2016. The indexation method of calculating your capital gain. [Online] www.ato.gov.au/General/Capital-gains-tax Available at: https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-loss/The-indexation-method-of-calculating-your-capital-gain/ [Accessed 13 September 2016].

Investopedia, 2016. Accounting Equation. [Online] Available at: https://www.investopedia.com/terms/a/accounting-equation.asp [Accessed 21 September 2016].

Pwc, 2013. Australia: Legislation to remove 50% capital gains tax discount for foreign and temporary residents is now law. [Online] www.pwc.com Available at: https://www.pwc.com/gx/en/hr-management-services/newsletters/global-watch/assets/pwc-australia-removes-capital-gains-tax-discount.pdf [Accessed 19 September 2016].