Lecture 2: Is Tax Part of Other Subjects?
In this session, we are going to assess whether tax is a separate topic to be studied, or where does it fit in with the rest of the topics that we cover in accounting. Let’s have a look at the rest of the topics we traditionally cover in accounting:
Those are really the four important subjects that we study in accounting. And where does tax fit in? Is it a separate topic, or is it part of the other topics? Well, let me show you how integrated these topics are, specifically tax, to the other topics.
In tax, we will typically find in the balance sheet of the company; we will probably find an item which is called tax payable. Now that would be a creditor; I owe the revenue services an amount of money. Or in the income statement, I will probably have; definitely have - at least if I’m making profits - tax payable. Now that would be an expense account.
So you can clearly see, in order to get to accounting and the correct numbers in the balance sheet and the income statement, we need to know what the rules are. The specific rules, how do we calculate tax etc. and that fits into accounting in those financial statements.
If we talk about auditing and tax, of course, the auditor comes in, and he’s now going to audit the statements made in those financial statements. So for the auditor, it would be critical to do a recalculation of the tax payable. So for the auditor and in auditing, we find that we need to know about tax since we’re going to test the accuracy of tax.
In managerial accounting, we had an example where a person manufactures a table. And when manufacturing an item, we would have certain costs. Where does tax fit into there? Well, tax is part of the costs of manufacturing an item. It could be various taxes, for example:
Value-added tax (VAT). I’m paying VAT on the items that I bought and that forms part of the cost of producing an asset
Normal income tax payable on the amount
So clearly, what we’ve seen here is that tax really integrates in all the subjects. It’s critical to remember that tax forms part of all these subjects, and it shouldn’t be viewed in isolation. Because at the end of your studies you’re going to find that all these topics are integrated, and you’ve got to deal with it on an integrated basis.
Although tax as a subject is presented or studied as a separate subject:
It forms an important part of the other main subjects of accounting
It should not be viewed as an isolated topic or subject on its own