Question

1-Thoroughly explain the concept Comprehensive Income.

3- What is the difference between Temporary and Permanent differences between book and tax income? Give an example of each.

Answer 1

1. Comprehensive income -

In the income statement of the organization, only earned or incurred income and expenses are recognized. In other words, those incomes, expenses, losses, gains which change in equity of a business is comprehensive income. Comprehensive income include unrealized gains or losses. Means, the income is not from the ordinary activities of business.

Examples of unrealized income -

Unrealized gains/losses on derivative financial instruments, unrealized gains / losses on post retirement benifit plans, foreign currency translation adjustments etc.

A statement of comprehensive income is prepared, so as to provide complete information regarding overall gains and losses of organization to stakeholders.

So we can say,

Comprehensive income =

Net income (As shown in profit and loss account)

+ Unrealized gains and losses (As shown in Other Comprehensive Income Statement)

2. Difference between temporary and permanent differences between book and tax income -

Temporary differences are differences between taxable income and before tax book income which is REVERSIBLE. In other words, we can say, the transactions which are covered under temporary difference are those which are permissible for both income tax purpose and accounting purpose. The difference arises due to timing. Say, a particular expense is recognised in a year for accounting purpose, but for tax purpose , it is not recognised or partly recognised in that year. This is the reason, temporary differences are called timing differences.

Example - Suppose, a company provides for straight line depriciation for accounting purpose and for tax Purpose, it provides accelerated depriciation.

Cost of asset = $5000

Life of asset = 4 years

Depriciation per year as per straight line method =

$5000/4 years = $1250 per year.

Suppose depriciation for 1st year as per accelerated method = $2000

So, at the end of 4 year period, when the asset is fully depreciated, the difference amount of depriciation is reversed or eliminated.

Permanent difference - Permanent difference is difference between the tax payable and tax expense, due to the irreversible item or transaction. Such transactions are recognised for accounting purposes but not for tax purposes. Such expense are never deductible on income tax returns.

Example -

Penalties. Penalties are recognised for accounting purpose, but not allowed for tax purpose, or only certain percent is allowed in some cases.