# Concept of Deferred Tax with examples

CA RK , Last updated: 30 June 2018

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.

CA RK
(CA)
Category Accounts   Report

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