DEFFERED TAX-BRIEFS

Take simple example of Depreciation.

Simple concept is Deferred tax asset and liability arise due to difference between accounting profit and tax profit.

eg: under IT Act Depreciation for one particular asset is 100% allowed and under books you are depreciating the same asset for 5 years i.e. 20% SLM.

Here in the first year due to 100% depreciation allowance your taxable profit will greatly reduced and so your tax liability but in the following years your tax will be higher as you would not be able to claim depreciation allowance whilst calculating your taxable profit and hence your tax will increase, so to give effect to this transaction you will create Deferred Tax Liability in your first year accounts.

Remember only temporary timing difference needs to be accounted for and not the permanent eg. some expenses are not allowed in the IT act so those are permanent timing differnece and hence not to be accounted for. But temporary timing differences are Depreciation allowance, pension liability etc.

Simple concept is to go through each item in the balance sheet and P & L.

I hope this will help. For more help please refer to this link.

https://www.accaglobal.com/students/publications/student_accountant/archive/2002/28/570079

Good Luck.

Yash