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Deferred Tax

Nadim Khan (Accounts) (58 Points)

14 August 2007

I have to prepare my company's balance sheet on monthly basis, but I have no idea about deferred tax liability can any one send me some kind of computation or some simple notes which can help me ,

thanks,

nadim

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13 Replies

Nitesh (Chartered Accountant) (340 Points)
Replied 14 August 2007

In which industry ur co. belong to so that furthur guidance would be easy

(Guest)

I have no idea about deferred tax liability can any one send me some kind of computation or some simple notes which can help me

Nadim Khan (Accounts) (58 Points)
Replied 20 August 2007

I am working in a retail industry

siddh (Article (Final Result waited)) (391 Points)
Replied 24 August 2007

deffer tax liability will be made on tax ondiff. b/w a/cing income & taxable income

Nadim Khan (Accounts) (58 Points)
Replied 06 November 2007

Its in retail inustry thks,

CA. Vineet Grover (Chartered Accountant) (1538 Points)
Replied 06 November 2007

An income tax liability arises from differences between balance sheet values of certain assets and liabilities and the tax basis of those same assets and liabilities. Farm fi nancial statements, especially the balance sheet, should be prepared with recognition given to this income tax liability, or deferred taxes. Deferred taxes reconcile the tax basis of a balance sheet with the basis currently being used for valuing assets and recording liabilities. That is, if all assets could be liquidated for exactly the amount shown on the balance sheet, and if all liabilities could be satisfi ed by payment of exactly the amount shown on the balance sheet, then what taxable income would result and what would be the tax liability? The asset and liability values outlined in the example balance sheet (Table 1) are used to show the derivation of deferred taxes, or income tax liability, using the following three-step procedure.1 Step 1. Computation of current portion of deferred taxes. (See Table 2 for example computations.) The total amount by which the balance sheet value of current assets exceeds their taxable basis is calculated. Deferred income, such as crop insurance proceeds — reported for fi nancial statements, but not recorded for tax purposes and for which no asset value exists on the balance sheet — must be included. Subtract the amount of current liabilities that result in deductions for tax purposes, such as accounts payable and accrued interest, from total deferred income calculated. The current portion of deferred taxes is then computed by multiplying an estimated total tax rate — which refl ects federal, state, local, and social security taxing authorities — times the net deferred income. Step 2. Computation of noncurrent portion of deferred taxes related to base value treatment of raised breeding livestock. (See Table 3 for example computations.) The difference between the base value and the tax basis for raised breeding livestock is calculated. The tax basis will be zero for raised breeding livestock that have not been capitalized and depreciated for tax purposes. Multiply the difference times the estimated total tax rate. Social security tax should be considered only on that portion of the difference subject to self-employment taxes. Step 3. Computation of noncurrent portion of deferred taxes related to differences between market values and tax basis or base value of noncurrent assets.Calculate the difference between the balance sheet market values of all noncurrent assets and their tax basis (base value for raised breeding livestock). For raised breeding livestock, the base value is subtracted from market value to determine the value — subject to capital gains tax. Noncurrent assets include breeding livestock, machinery and equipment, real estate, and improvements. The noncurrent portion of deferred taxes is computed by multiplying the calculated deferred taxable income times the estimated total tax rate for capital asset sales. The current and noncurrent portion of deferred taxes are recorded on the balance sheet as liabilities. If the total deferred income value, or taxable income, computed in steps 1 through 3 was negative, then a deferred tax refund would result, with the refund recorded as an asset on the balance sheet.

CA. Vineet Grover (Chartered Accountant) (1538 Points)
Replied 06 November 2007

i am not able to post you the practical problem as the format will not be readable

CA Jai Prakash Rarh (Chartered Accountants) (45 Points)
Replied 06 November 2007

vinit grover had tried very hard, he writeen too much on the subject. Nice efforts by him. But he hadn't written clearly. it seems more confusing. Too lenghty also. The words used are also very vouge. my suggest to Nadim is to read Accounting Standard - 22 (Accounting for Taxes on Income) issued by ICAI at the following link https://icai.org/icairoot/resources/as_index.jsp. Study it carefully, examples are also given there. And after that if u have any query, post it in the forum. u can also sent me at jprarh @ yahoo.co.in. i will try my best to solve that (I m not an expert on this but had practical experiance) Thanks

sathyan (Articleship) (52 Points)
Replied 14 November 2007

Deferred tax liability/asset is a concept which arises due to two (rates) kinds of depreciation
A) Co's Act
B) IT Act

In P&l A/c we will create provision for tax on the basis of book profit(Profit after Co's Act depreciation).But we will pay Tax only after deducting IT Act depreciation i.e we will add back Co's Act Depreciation.

Therefore Provision for Income tax is not equal to Payment for Income Tax.This is called Timing Difference.

Therefore to fill this gape we have created a concept called deferred tax Asset/Liability.

How to Calculate Deferred Tax Asset/Liability?
Provision for Deferred Tax = (Difference between Co's Act & IT Act Depreciation *33.66%).

If the above concept is clear i will continue to next step afterwards...........

Cheers
Sathyan

4 Like

Miss Komal Mantri (Chartered Accountant ) (1974 Points)
Replied 17 November 2007

read AS 22

teja surya kumar (student) (23 Points)
Replied 24 February 2009

any one can tell me how to calaculate differed tax liability................please.....

Ranjan (ASST. MANAGEr) (22 Points)
Replied 03 April 2009

any one can tell me how to calculate deferred tax liability & deferred tax assets. please send me computation

k.manikanta swamy (Student CA IPC / IPCC) (32 Points)
Replied 06 May 2015

deferred tax can be asset or liability. It can be due to timing difference or permanent difference.

Timing difference is due to this period difference. e.g, depreciation. it can be resolved. hence it can be reversed in next period.so it is called temporary difference.

Permanent difference is due to difference which are not settled in previous period and cannot be resolved. e.g, goodwill amortization expense.They are never be reversed.they are non deductable and non taxable revenues. hence in this case also deferred tax arises.

can i explain with little example.

due to temporary difference:- depreciation as per income tax- 5000

depreciation as per companies act- 7000

difference - 2000

due to this difference we are not paying tax on that 2000 amount as we deducted extra. so it is taken as serious issue by income tax department and it says to pay tax on that 2000 amount. so we pay tax as ( 2000*30%). it arises due to arguement and hence we show it under deferred tax in profit and loss account.

note:- if there is any opening balance let suppose 100. then (600-100) is shown in profit and loss account as 100 is carried amount.and 600 is shown in balance sheet in current liabilities as deferred tax liability.

i hope u will understand same calculation in case when deferred taxbecome asset. asume we are paying tax less then it become deferred tax asset. and follow treatment as applicable i mentioned in case of deferred tax liability as i mentioned above. i can explain but try once. if u have any queries kindly mail me to manikantaswamy.prabhas @ gmail.com

Thank you for giving me this opportunity.