Question

Would you agree that the deferred taxes are a result of the difference of financial statements shown on the accrual basis and taxes are on the cash basis?

What is the difference?

Answer 1

Deferred tax is an accounting measure to match the difference between the taxes calculated on accounting income and taxable income. We all know about the fact, that taxable income is different from accounting income and this is due to some of the temporary timing differences. It may be categorised into 'Deferred tax asset' and 'Deferred tax livability.

- Deferred tax asset means when an item of the current year will lead to decrease in tax payable(i.e.tax savings) in future.Eg - the interest on bank loan was paid after the date of filing of return, then it will not be allowed as deduction in the current year. But will be allowed as deduction in further year. In such a case Deferred tax asset can be reserved.

- But in case if an item of current period, causes increase in tax payable in future then it is accounted as Deferred tax liability.

On the basis of above evaluations we can say that deferred tax is created due to the timing difference, but not because of the acrrual or cash basis.