From the course: Accounting Foundations: Asset Impairment
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Accelerated depreciation and income taxes
From the course: Accounting Foundations: Asset Impairment
Accelerated depreciation and income taxes
- Get ready for a statement that might shock you. Companies do not use the same accounting rules when preparing their income tax reports, as they do when they prepare their income statements that they give to their investors and to their banks. There are two sets of books, and there have to be. The purpose of the income statement is to give investors and lenders the information they need to make decisions. The purpose of the income tax system is for governments to fairly and efficiently collect tax revenue. There is no reason to think that the same rules can accomplish both purposes. For financial reporting purposes, straight line depreciation gives investors and lenders reasonable information about the annual cost of using long term assets. For income tax purposes governments around the world often use depreciation accounting to encourage businesses to invest in productive assets. Governments do this by allowing…
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