Income tax accruals and Deferred Income taxes

In the investors statement of income, the proportion of the share of the net income of the investee is reported as a single line entry except inn situations where the investee possesses extraordinary materials that would affect the investor's net income statement. Such materials would be reflected as extraordinary materials in the investor's income statement. The method therefore eliminates intercompany profits and losses (Eisen 43).

Any excess paid for shares over their book value of the purchased subsidiary must be identified and if need be amortized or depreciated (Eisen 90). In cases where the investor owns over half of the investee's outstanding stock a consolidated financial statement for the group is presented (Eisen 110). The relationship is considered an affiliation as the investee can exercise control over the operations of the investee (Eisen 111). The equity method is used in the presentation of financial reports for unconsolidated subsidiaries in a consolidated financial report.

If the parent company is preparing unconsolidated reports then the investments in the subsidiaries are reported through the use of equity accounting. The application of equity accounting methods is continuously being adopted in accounting circles due to an increase in corporate ownership. Capitalism is characterized by increased investments in joint ventures and therefore it is becoming common place for major corporations and private investors to have stake in more than one company.

Multinational companies may have considerable influence on local companies whose stock they posses and therefore the application of equity accounting finds relevance in such cases. One of the most important decisions that has to be made by businesses before they start operations regards the basis of their bookkeeping which can either be on an accrual or cash basis. The accrual system is where the income is recorded as when it is earned without considerations on whether it will be received or not.

The expenses are also recorded as per when they were accrued without considerations on whether they will be paid. Taxpayers are not necessarily required to use a specific method by the Internal revenue service (IRS) (Eisen 32). However, the stock markets and other bodies may require public companies to strictly use the accrual basis in stating their incomes  (Eisen 60). The IRS requires that the method used when a taxpayer first files his tax returns should be used consistently thereafter and any changes in the system must be approved by the IRS.

If an investor own more than one business the use of different methods of accounting is allowed, though they must be kept separate from each other as each business is treated as separate entity. Even though the use of any method is allowed there are restriction to the use of the cash method in that corporations with a gross receipt of over $5 million excluding the S corporations, partnerships that partners with such corporations and tax shelters are all excluded from the use of cash system of accounting (Eisen 22).

When using the accrual method, incomes must be reported in the tax year they were earned and expense deducted in the same manner. The time of payment is disregarded in either case and has no bearing on the nature of the results. For taxation purposes, income is reported when earned, due or payment is received depending on which one comes first. Therefore, recording of income is done when events that lead to their reception have occurred and the amount associated with the revenue or expense can be determined with pinpoint accuracy.

Advance payments for services that will be received later are charged in the same years that they are received. This scheme changes if there is an agreement that the completion of the service will be in the next fiscal years thereby the recognition of the income is included in the next years records. The postponement of advance payments cannot go beyond one year. If any part of the service will go beyond the next year, all advance payments will have to be recorded in the year the receipt will be made and none of it would appear in the next year's records.

Advance rent income can only be recorded in the years that they are received and can never be postponed. If a business provides a business agreement for a property that it owns, advance income associated with such property can be postponed. However, this is only applicable in cases where the business also earns income from properties that do no have service agreements in their course of operations.