Defeered tax

HI Varun,

Then what is TAX LIABILITIES? Also can you give 1 example for each type.

Satish

CMA Inter I

Deferred Tax is a very simple concept! Accounting income as per books and income computed as per income tax provisions will differ. If the taxable income is more and if it is due to temporary timing differences which are eventually gonna be set right, then we will have to pay more tax for the current period. Since, this situation arose due to timing differences and we are going to get the benefit of the same in the coming periods, it can be considered as a deferred asset. Hence the deferred tax asset. Deferred tax liability is just vice versa. When taxable income is less than the accounting income for the period which is due to timing differences, then we have a situation where we pay less tax for the period due to the provisions of income tax act which are eventually going to get adjusted. Hence, its a Deferred liability.

In short, Pay more tax in CY and subsequently enjoy the benefit - Deferred tax asset 

Pay less tax in CY and in subsequent periods pay more - Deferred Tax Liability

DEAR SATISH, EXAMPLE :- ABC LTD. TAKE DEDUCTIONS OF DONATIONS AND BONUS NOT YET PAID UNDER PROFIT & LOSS A/C OF COMPANY BUT ACCORDING TO INCOME TAX ACT BONUS NOT YET PAID & DONATIONS DISALLOWED U/SECTION 43B OF INCOME TAX ACT WHILE COMPUTATIONS FOR INCOME TAX PURPOSE. BUT THE BENEFIT OF BONUS NOT YET PAID WILL AVAILABLE IN FUTURE YEARS WHEN ITS PAID DUE TO TIMING DIFFERENCE & TAX ON ADDITIONAL AMOUNT(BONOUS NOT YET PAID)WILL BECOME DEFFERED TAX ASSETS BUT THE BENEFIT OF TAX PAID ON ADDITIONAL AMOUNT (DONATIONS) WILL NOT AVAIL DUE TO PERMANENT DIFFERENCE JOURNAL ENTRIES:-      (A)   DTA A/C DR.   TO  PROFIT &LOSS A/C (BEING DTA CREATED ON BONOUS AMOUNT) ,(B) PROFIT & LOSS AIC DR.  TO  D.T.A. (BEING DEDUCTIONS CLAIMED IN NEXT YEAR WHEN BONUS ACTUALLY PAID) ,EFFECT IN P& LOSS A/C:- THE CURRENT TAX INCULDE D.T.A AMOUNT WILL DEDUCT FROM PBT & DTA WILL ADD IN PBT  & THERE IS NO EFFECT ON P& LOSS A/C. EFFECT IN BALANCE SHEET:- IN ASSETS SIDE CASH WILL DEDUCT DUE TO CURRENT TAX WHICH INCULDE THE D.T.A. AMOUNT & DTA WILL COME UNDER HEAD NON CURRENT ASSETS & THERE IS NO EFFECT IN BALANCE SHEET