Deferred tax accounting

🧾 Deferred Tax Accounting – Explained Clearly

Deferred Tax Accounting deals with the timing differences between accounting profit (book profit) and taxable profit (as per Income Tax laws). It helps reflect the future tax impact of current transactions.

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📘 Key Concepts

Term	Definition
Deferred Tax Asset (DTA)	Taxes overpaid or book expenses not yet deductible – leads to future tax benefit
Deferred Tax Liability (DTL)	Taxes underpaid or book income not yet taxable – leads to future tax payment

These arise due to temporary differences between book and tax treatment of items.

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🔁 Why Do Deferred Taxes Occur?

They arise due to:

• Different depreciation methods (e.g., WDV vs SLM)

• Provision for doubtful debts (allowed in books, not tax)

• Revenue recognition timing

• Carry forward losses or MAT credits

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🧮 Basic Formula

$$\text{Deferred Tax} = \text{Temporary Difference} \times \text{Applicable Tax Rate}$$

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🔍 Examples

📌 Deferred Tax Liability (DTL)

Book depreciation = ₹100
Tax depreciation = ₹200
→ Profit higher in books than tax
→ Pay less tax now, but more later

$$\text{DTL} = (₹200 - ₹100) \times 30\% = ₹30$$

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📌 Deferred Tax Asset (DTA)

Provision for bad debts = ₹50 (recorded in books but not allowed in tax)

$$\text{DTA} = ₹50 \times 30\% = ₹15$$

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🧾 Journal Entries

✅ To record DTL

Income Tax Expense A/c .......... Dr  
     To Deferred Tax Liability A/c

✅ To record DTA

Deferred Tax Asset A/c .......... Dr  
     To Income Tax Expense A/c

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📊 Presentation in Financial Statements

Statement	Treatment
Balance Sheet	DTA: Asset side, DTL: Liability side
P&L / Income Statement	Net deferred tax (increase/decrease) affects income tax expense

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📌 Reversal of Deferred Taxes

Deferred tax entries reverse in future years when temporary differences settle.

Example:

• DTL created due to excess depreciation now

• In later years, book depreciation will exceed tax depreciation → DTL reverses

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✅ When to Recognize Deferred Tax

📍 Recognize DTA only if:

• Realization of future tax benefit is probable (as per prudence concept)

📍 Recognize DTL always (unless exception applies)

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📘 Summary Table

Item	Timing Difference	Deferred Tax Type
Excess tax depreciation	Temporary (tax > book)	DTL
Provision for expense	Book allowed first	DTA
Revenue received in advance	Taxable now, book later	DTA
Expenses disallowed temporarily	Tax later, book now	DTA

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⚖️ Standards Governing Deferred Tax

Region	Standard
IFRS	IAS 12 – Income Taxes
US GAAP	ASC 740
India	Ind AS 12 / AS 22