Differed tax

Dear Gaurav,

Deferred tax basically arises due to timing difference beween taxable income and accounting difference.

For instance depreciation u/s 32 and as per accounts may be different this can result in a timing difference and can lead to creation of deferred tax., Carry forward losses or unabsorbed depreciation.

Types:

1) Deferred Tax Assets: This arises when a co pays higher tax in the current year but lower tax in the future years.

2) Deferred Tax Liability: This arises when a co pays lower tax in the current year but a higher tax in the future years.

This is only a simplified example to understand DTA concept

EX : Suppose accounting income ( i.e.net profit ) as per p& l a/c is rs 60000 after deducting sales tax incurred during the yr rs 5000. sales tax paid during the yr is rs 2000. suppose flat tax rate 40%

now profit as per income tax will be calculated as thus :

        profit as per p& l a/c                                                                                60000

add: sales tax disallowed u/s 43(B)                                                             3000

         profit as per income tax                                                                         63000

         tax payable                                                                                               25200

                                                                         here since profit as per accounting income differs from profit as per taxable income DTA / DTL concept arises .

DTA : here we r paying tax rs 25200 when we had paid rs2000. but if we had paid all due sums of sales tax rs 5000 in the current yr then we would have to pay income tax rs 24000 (60000*40%).thus we can say that we have paid more tax in current yr & we will pay less tax in future yr. so here DTA arises.

journal entry for DTA :

                               DTA A/C Dr.                                                                     1200

                                    TO P & L APP A/C                                                                 1200

Being rs 1200 (3000*40%) is identified as DTA

• If in next yr rs 3000 is paid then reversal of such entry  will be pssed. 
• In this example  sales tax  is a item of timing diff. For permanent diff items no DTA or DTL is recognised       

rightly expained by Ravi Dasija and priyatambika..

bt i will suggest u to go through this concept in detail since it is imp for ca final..