Questions on Accrual and Deferred Tax


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Hello Sir,

Can you please explain accrued funda.

And also an example using defferrd tax asset/ liabilty and amortization will be really helpful.

Thanks,
Prativa

3 Answer(s)


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Prativa - Accrual accounting measures a company's finances by business events irrespective of when cash was debited or credited in the account. All of us are typically used to cash accounting were we account for revenue, expenses etc when cash is either deposited or removed from our accounts.

However company's always use accrual accounting and not cash accounting. Simple example is this - if you buy a TV with a credit card for Rs.50,000, in cash accounting this Rs.50,000 will be considered as revenue only when the company gets the cash from the credit card company (in a few days). In accrual accounting, the Rs.50,000 is immediately considered as revenue, since the cash will come anyway.

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Lets assume that your company has $100 million of R&D expense that needs to be amortized. Internally you might amortize this over 7 years ($100million / 7), but according to tax laws R&D will have to be amortized over 10 years ($100 million/10). So on your books the R&D expenses will be fully amortized in 7 years, but in your financial statements for tax filing it will be fully amortized over 10 years. So in the last 3 years your net income for tax purposes will be lower than your actual/book net income due to this extra amortization expense.


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