What is Deferred Tax Asset and Deferred Tax Liability and When is balance of deferred Tax Asset or Liability transferred to Profit and Loss A/c? Kindly Help.
the companies prepare there profit and loss accounts as per companies act (Sch-VI), However they have to pay income tax as per income tax act. Some expense are to be deducted from profit and loss account in order to comply schd-VI, but the expense are not allowed in income tax act for a particular year or years. Hence there are a difference b/w profit as per companies act and profit as per income tax act. These differences have been divided b/w permanent differences and timing differences. Deffered tax asset and deferred tax liability are to be prepared for all timing differences (temporary differences). If an expense is allowed as per companies act, but the same is not allowed as per income tax act for a particular year or years then it is a timing difference and we have to make deffered tax asset and vice versa we have to make deffered tax liability. no deferred tax asset/liability is to be made for permanent difference. current tax and deferred tax asset/liability are the tax expenses of the company and we show it as a below the line item.
CAclubindia
