Nisa company in UK, where the tax system gives capital allowance (money deducted

Question

Nisa company in UK, where the tax system gives capital allowance (money deducted from the overall income tax). The tax year runs from 10th of April to 9th of April. The financial year of the company end was 30 of June. Tom is farmer and want to buy machine in March and wanted the machinery invoiced in in March, but would pay in August when the machine will be delivered.

A. Why do you think Tom wished to do this?

B. The manager of Nisa company accepted and decided to send the bill to the farmer Tom and record the transaction as revenue as soon as the bill has been sent. Why do you think the manager accept and decided to do revenue recognition in the way that he decided to do? Is there profit management here? explain your answer and show if there advantage and disadvantage of manager’s decision.

Explanation / Answer

A) Tom would do that because by doing this, he is delaying the payments I.e. cash outflows and can invest that or earn interest on that. And by making the invoice in march, he can show that cost in the books in the current financial year and can save taxes in the current year on the cost of equipment.

So, essentially he is deferring the tax payments.

B) The manager decided to recognise revenue in current year, because of the matching principle. Also, the net revenue recognition will increase the net income and hence would make the company more profitable and a picture of enhanced performance.

But, also recognising the revenue in the current year will also make the company pay taxes in the current year and hence increase the tax payments, which is a disadvantage.

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