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Deferred Tax Liability

Example for FY 2017-18




Particulars

As per Books of Accounts

As per Income Tax Act

Difference

Profit after all expenses but before Depreciation

50 00 000

50 00 000

(-) Depreciation

6 00 000

10 00 000

- 4 00 000

Profit before Tax

44 00 000

40 00 000

4 00 000

Income Tax @ 30%

13 20 000

12 00 000

1 20 000


For the sake of simplicity & understanding, we are ignoring surcharge and education cess.

Now, as we can see from the above example, Tax Amount as per Books of Accounts(BOA) is Rs.13,20,000/- and as per Income Tax(IT) is Rs.12,00,000/-. The difference of Tax Amount as per BOA and IT is because of difference in amount of depreciation.

Depreciation is a temporary difference and thus, concept of deferred tax will come into picture.

Actually, we should book Tax Expense in Books of Accounts for Rs.13,20,000/- considering the concept of accrual basis as per books of accounts as base. But Tax Amount as per IT is only Rs.12,00,000/- because of higher amount of depreciation as per IT.

Now, as far as accounting is concerned, the following entries will be passed in Books of Accounts:

1. Profit & Loss A/c........... Dr Rs. 12,00,000/-
To Provision for Income Tax Rs.12,00,000/-

2. Profit & Loss A/c......... Dr Rs.1,20,000/-
To Deferred Tax Liability A/c Rs.1,20,000/-

(Here, we are creating deferred tax liability for FY 2017-18)
Therefore, Total Tax Amount will be Rs.13,20,000/- which will be presented in Statement of Profit & Loss Account as follows:

Income Tax Rs.12,00,000/-
Deferred Tax Rs.1,20,000/-

Total Rs.13,20,000/-

Now let's consider next year and see how the entries will be passed for reversal of Deferred Tax Liability.

Example for FY 2018-19


Particulars

As per Books of Accounts

As per Income Tax Act

Difference

Profit after all expenses but before Depreciation

70 00 000

70 00 000

(-) Depreciation

10 50 000

6 50 000

4 00 000

Profit before Tax

59 50 000

63 50 000

- 4 00 000

Income Tax @ 30%

17 85 000

19 05 000

- 1 20 000


Now, for FY 2018-19

Actually, we should book Tax Expense in Books of Accounts for Rs.17,85,000/- considering the concept of accrual basis as per books of accounts as base. But Tax Amount as per IT is Rs.19,05,000/- because of higher amount of depreciation as per BOA.

Now, as far as accounting is concerned, the following entries will be passed in Books of Accounts:

1. Profit & Loss A/c........... Dr Rs. 19,05,000/-
To Provision for Income Tax Rs.19,05,000/-

2. Deferred Tax Liability A/c......... Dr Rs.1,20,000/-
To Profit & Loss A/c Rs.1,20,000/-

(Here, we are reversing the deferred tax liability of FY 2017-18)

Now, after passing the above 2 entries for FY 2018-19, Deferred Tax Liability Account will become 0 and Net Impact on Profit & Loss A/c on account of Income Tax Expense will be Rs.17,85,000/-.

Similar is the case of Deferred Tax Asset. If one understands the logic behind deferred tax concept, it becomes really easy to understand and calculate deferred Tax Asset & Liability and their impact on financial statements.

Deferred Tax Asset

Let's now have a look at the example of Deferred Tax Asset in similar manner as we have seen for Deferred Tax Liability.

Example for FY 2017-18


Particulars

As per Books of Accounts

As per Income Tax Act

Difference

Profit after all expenses but before Depreciation

80 00 000

80 00 000

(-) Depreciation

15 00 000

10 00 000

5 00 000

Profit before Tax

65 00 000

70 00 000

- 5 00 000

Income Tax @ 30%

19 50 000

21 00 000

- 1 50 000


Now, as far as accounting is concerned, the following entries will be passed in Books of Accounts:

1. Profit & Loss A/c........... Dr Rs. 21,00,000/-
To Provision for Income Tax Rs.21,00,000/-

2. Deferred Tax Asset A/c......... Dr Rs.1,50,000/-
To Profit & Loss A/c Rs.1,50,000/-

(Here, we are creating deferred tax asset for FY 2017-18)

Now let's consider next year and see how the entries will be passed for reversal of Deferred Tax Asset.

Example for FY 2018-19


Particulars

As per Books of Accounts

As per Income Tax Act

Difference

Profit after all expenses but before Depreciation

80 00 000

80 00 000

(-) Depreciation

10 00 000

15 00 000

- 5 00 000

Profit before Tax

70 00 000

65 00 000

5 00 000

Income Tax @ 30%

21 00 000

19 50 000

1 50 000


1. Profit & Loss A/c........... Dr Rs. 19,50,000/-
To Provision for Income Tax Rs.19,50,000/-

2. Profit & Loss A/c......... Dr Rs.1,50,000/-
To Deferred Tax Asset A/c Rs.1,50,000/-

(Here, we are reversing the deferred tax asset for FY 2017-18)

Now, after passing the above 2 entries for FY 2018-19, Deferred Tax Asset Account will become 0 and Net Impact on Profit & Loss A/c on account of Income Tax Expense will be Rs.21,00,000/-.

I hope I have explained the concept of deferred tax in a simple manner.


 

Published by

CA RK
(CA)
Category Accounts   Report

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