ITAA Toelatingsexamen flashcards

34 cards. Read the term and the definition here. The deck at the top of this page is optional.

Accounting equation

Assets equal liabilities plus equity. Every transaction keeps this balance, because each journal entry records equal total debits and total credits.

Debit and credit effect

Debits increase assets and expenses and reduce liabilities, equity, and revenue. Credits do the opposite. Each entry must have equal debits and credits.

Accrual basis

Revenue is recorded when earned and expenses when incurred, regardless of when cash moves. Period-end adjusting entries record accruals, prepayments, and depreciation.

Straight-line depreciation formula

Annual depreciation equals cost minus residual value, divided by useful life in years. The same amount is charged each full year until the asset reaches residual value.

Declining balance depreciation

Depreciation equals the opening carrying amount multiplied by a fixed rate. Charges are higher early and lower later, and the asset is never depreciated below residual value.

FIFO inventory costing

The earliest purchase costs are assigned to cost of goods sold, and ending inventory carries the most recent costs. In rising prices, FIFO reports higher profit than weighted average.

Weighted average unit cost

Total cost of goods available for sale divided by total units available. The same unit cost is applied to units sold and to ending inventory.

Lower of cost and NRV

Inventory is written down when net realizable value falls below cost. IFRS permits reversal of the write-down; US GAAP generally does not.

Five-step revenue model

Identify the contract, identify performance obligations, determine the transaction price, allocate it to obligations, and recognize revenue when each obligation is satisfied.

Trial balance limits

Equal debit and credit totals do not prove accuracy. Errors of principle, compensating errors, and omitted entries can leave the trial balance balanced.

Closing entries

Revenue and expense balances are closed to profit or loss, which is then closed to retained earnings. Temporary accounts then begin the new period at zero.

Current versus non-current

Assets and liabilities are classified as current when realized or settled within twelve months or the normal operating cycle, whichever is longer.

Bank reconciliation purpose

It explains differences between the bank statement balance and the cash book balance, such as unpresented cheques, deposits in transit, bank charges, and errors.

Gross profit margin

Gross profit divided by revenue, expressed as a percentage. It measures profitability after direct cost of sales but before operating expenses.

Working capital

Current assets minus current liabilities. A positive figure indicates short-term obligations can be met from assets expected to convert to cash within a year.

Residence versus source

Residence generally triggers tax on worldwide income, while source rules decide which country may tax a specific item. Treaties allocate taxing rights between states.

Double taxation relief

The same income taxed in two countries is relieved either by exempting foreign income at home or by crediting foreign tax against domestic tax on that income.

Permanent difference

An item that is included in accounting profit but never taxable, or deducted for tax but never in accounts. It does not reverse and creates no deferred tax.

Temporary difference

A difference between carrying amount and tax base that reverses in later periods. It creates a deferred tax asset or liability at the expected reversal rate.

Deferred tax asset test

A deferred tax asset is recognized only when future taxable profit is probable. Unrecognized assets are reassessed each period and recognized when recovery becomes probable.

Tax base of an asset

The amount deductible for tax purposes against future taxable economic benefits from the asset. Comparing it with carrying amount identifies taxable or deductible temporary differences.

Arm's-length principle

Related-party transactions must be priced as independent parties would agree. Transfer pricing methods include comparable uncontrolled price, resale minus, cost plus, and profit split.

VAT output minus input

Tax charged on sales is output tax; tax paid on purchases is input tax. Tax payable equals output tax minus recoverable input tax for the period.

Exempt versus zero-rated

Zero-rated supplies are taxable at 0 percent, so related input tax is recoverable. Exempt supplies are outside the scope of tax, so related input tax is generally not recoverable.

Capital gains computation

Gain equals disposal proceeds minus acquisition cost, improvement costs, and incidental selling costs. Reliefs may defer or reduce the gain depending on the asset and jurisdiction.

Carry-forward loss relief

Unrelieved trading losses may offset future profits of the same trade, often subject to continuity of ownership or trade tests set by national law.

Thin capitalization rules

Interest deductions are limited where debt exceeds a permitted ratio of equity or earnings. Excess interest is disallowed or deferred, reducing base erosion through related-party debt.

Controlled foreign company rules

Undistributed profits of low-taxed foreign subsidiaries may be taxed in the parent's country, preventing deferral of tax through offshore accumulation.

General anti-abuse rule

A rule allowing tax authorities to disregard arrangements whose main purpose is obtaining a tax advantage, restoring tax based on the substance of the transaction.

Taxable profit bridge

Start with accounting profit, add non-deductible expenses, subtract exempt income and allowances, then apply available losses to arrive at taxable profit.

Withholding tax

Tax deducted at source by the payer on payments such as dividends, interest, or royalties to non-residents. Treaty rates may reduce the domestic rate.

Permanent establishment

A fixed place of business or dependent agent through which a non-resident carries on business, giving the source country taxing rights over attributable profits.

Tax avoidance versus evasion

Avoidance uses legal arrangements to reduce tax contrary to legislative intent and may be counteracted by anti-abuse rules. Evasion involves illegal concealment or misreporting.

Input tax recovery condition

Input tax is recoverable only when purchases are used for taxable business supplies and valid documentation exists. Input tax on exempt or private use is restricted.