Mister

748 Words Jul 25th, 2012 3 Pages
Deferred tax is an accounting concept, meaning a future tax liability or asset, resulting from temporary differences between book (accounting) value of assets and liabilities and their tax value, or differences between the recognition of gains and losses in financial statements and their recognition in a tax computation (FASB). Deferred tax is important in understanding the financial situation of a company’s operation because it provides a more accurate calculation of accrual earnings and accurate measure of the equity position, and moderates earning by increasing the tax liability in good years and decreasing the tax liability in bad years (Todd A. Doehring). Generally, deferred tax could be deferred tax assets or deferred tax liability …show more content…
A deferred tax liability records the fact that the company will in the future pay more income tax because of a transaction that took place during the current period, such as an installment sale receivable. Because there are differences between what a company can deduct for tax and accounting purposes, there will be a difference between a company's taxable income and income before tax (FASB)
The temporary differences are the differences between the carrying amount of an asset and liability and its tax base. Two types of temporary differences can arise taxable temporary difference and deductible temporary difference. The taxable temporary difference results in the payment of taxes when the carrying amount of a liability is settled or the carrying amount of an asset is recovered. Taxable temporary differences give rise to deferred tax liabilities. A deferred tax liability arises if the carrying value of an asset is greater than its tax base or if the carrying value of a liability is less than its tax base. Deductible temporary differences result in amounts being deductible when determining the taxable profit or loss in the future period when assets or liabilities are recovered or settled. Deductible temporary differences give rise to deferred tax assets. A deferred tax assets arises if the carrying value of an asset is less than its tax base or if the carrying value of a liability is greater than its tax
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