Accounting path

Deferred tax arises from timing differences between accounting income and taxable income, often due to varying depreciation rates or expense recognition rules. Deferred tax assets occur when these timing differences reduce future taxable income, essentially acting as an advance payment for future tax credits. Conversely, deferred tax liabilities represent taxes payable in the future. A deferred tax asset can appear on the balance sheet if taxes have been prepaid, leading to a reduced tax bill later.