Deffered Tax Liability

A/c entries 4714 views 7 replies

Bheem Rao

Employee

40 Points Joined September 2008

Dear All,

Can anyone tell me what is Deferred Tax Asset & Deferred Tax Liability is please..

Thanks,

Rajesh

Replies (7)

CA Shree Jain

Chartered Accountant

1572 Points Joined August 2008

Deferred tax: The concept of deferred tax, as one requiring adjustment of profit, has also been a matter of historical accounting.

Timing differences arise out of various situations, some of which are short/long term while others permanent. Short-term differences arise because of disallowances -- such as bad debts or accrued expenditure -- likely to be paid and allowed in the very next year.

Long-term differences, which are not permanent, may arise out of accelerated/differential depreciation amortised in the assessee's books at normal rate. Rollover relief, which is now recognised under the block scheme of depreciation, will also spread over amortisation to a longer period. Such temporary differences are described as timing differences in AS 22. Permanent differences arise in respect of capital expenditure on which depreciation is not admissible, or items such as entertainment expenditure which are disallowed.

Section 43B is a classic case of timing difference, both temporary and permanent. Interest payable to banks and financial institutions are examples of temporary difference deductible on payment, while delayed welfare dues do not get allowed at all, servi ng as an example of a permanent difference.

Timing differences -- no precise guidelines: Treatment of deferred taxes has been the subject matter of treatises on accountancy, though not in accounting practice in India. Spicer and Pegler, in Book Keeping and Accounts, draws attention to the need for deferred tax to make the system more realistic, but there is no consensus about the manner in which it should be translated in accounting.

The following guidelines may be followed as a Golden Rule for the calculation of deferred tax asset or liability:

1. Analyse and compare the WDV as books and Income tax as on the date of balance sheet. In case, the WDV as per books is more, a liability is to be created otherwise an asset.

2. Take out the difference of the two WDVs as said above. Apply current tax rates on the difference in WDVs, it will be ur liability or asset requirement as on the date of B.sheet for current year.

3. The difference of liability/asset as on CY b.sheet and LY B.Sheet may be adjusted to P & L a/c to make the figures to the CY requirement.

4. All other timing differences may be compared in the similar way. Say, there is increase in the figure of CF losses then the current rate applied on the new CF loss will be the requirement of asset as on date.

Sweta Kalantri

79 Points Joined August 2008

Hello..

AS-22 Accounting for taxes on income requires to include tax expense in P&L.

Tax expense= Current tax (+/-) defered tax
current tax = incometax payable in respect of TAXABLE INCOME.
defered tax = tax effect of timing difference.
Timing difference= difference in taxable income and accounting income which originates in one period and set-off in other likedisallowance u/s 43B, tds disallowance.
types of defered tax=

1) defered tax asset= defered tax assest is created when taxable profit is greater then accounting profit bcoz we will be paying more tax in current year and in subsequent year we will be claiming expense of the amt disallowed.

2) defered tax liablity=it is created when acccounting income is greater then taxable income.

for detailed accounting entries reffer AS -22

Regards,

Sweta

CA Himanshu Awasthi

Manager (Advances)

520 Points Joined November 2007

Both Ash & Sweta ji has clarified the conept in very good way.

PARIKSHITH

99 Points Joined October 2008

Companies pay tax based on taxable income as per Income tax act whereas accounts are prepared based on Companies act and AS issued by ICAI.

The basis of determining the income in both accounting and taxation is different. What is paid currently is based on taxable income which in some cases may be either substantially greater/lower compared to the accounting income.

This excessive/deficient payment of tax during the current period would end/ up as paying lower/greater tax in the future on account of certain items of expenses/income not recognized temporarily in tax/accounting would be recognized in the future years upon payment of expenses/realization of income.

Such excessive payment is referred to deferred tax asset and deficient payment is referred to as deferred tax liability. When these items of expenses/income are getting reversed in the future then DTA/DTL shall be reversed.