Question

Identify and explain the four steps required in order to calculate deferred tax.

Answer 1

Deferred tax-

Deferred tax concept is arised in order to comply with the matching principle of accounting.If we don't have this concpet our basic principle of accounting like matching and conservatism will be diluted.

Deffered tax adjustment is an accounting treatment where the expected liability is predetermined and booked based on existing factors.The asset is also booked on expected factors but, booking deferred tax asset is subject to fulfilling condition of revenue in the year of reversal of deferred tax asset.

Steps involved in computing deferred tax adjustment:

1-Calculate the book value of any asset or liabilty.

2-Calculate the tax base of same asset or liability [Whether Tax authorities will allow the asset/liability to be consumed upto the recorded value in the books]

3-Calculate whether there is difference between the tax base and accounting value of such asset or liability[..Note 1], and determine whether the difference is taxable or tax deductible.Temporary difference.

4-Apply the rate of year of reversal of such deffered taxx adjustment.

Note....1-

Now let's understand the concept in detail.

Book value is the accounting value of asset or liabilty.

Tax base is the amount for which adjustment shall be allowed on the same asset or liability in tax laws.

Determine whether the difference is permananent or temporary.Parmanent differences are not subject to deferred tax adjustment.Parmanent here is o say, that there will always remain a gap between the book value and tax base.Temporary difference is the difference which will keep changing from time to time.

Determine whether the difference is tax deductible or taxable.Here tax deductible is, Amount which now is taxed and later will be allowed by tax laws.This would create a deffered tax asset.Taxable temporary difference are the difference in which, company's are provided with the relief of tax in current year but in future year these tax will be chargeable.

Find the rate of year of reversal of deferred tax asset/liability.

Apply such rate on such temporary difference and provide journal entry.

That's it,

Please comment for any additional or specific explanation,

thanks,