1. Deferred Tax
Income Statement
Approach
Balance Sheet Approach
It arises from the timing/temporary
difference between Accounting book and Tax
return in recognizing income and expenses.
Tax Profit > Accounting Profit
= Deferred Tax Asset
Accounting Profit > Tax Profit
= Deferred Tax Liability
Tax Base > Accounting Base
= Deferred Tax Asset
Accounting Base > Tax Base
= Deferred Tax Liability
*In case of Base of Liabilities, the amount shall be considered in negative figure. Thus, ‘0’ is greater than ‘-10,000’.
2. Example: Depreciation
An Office Equipment has been Purchased at cost of 100,000 and depreciated in straight line basis. Suppose, For Tax
purpose, reducing Balance method depreciation of 10% is used. Consider Profit Before tax and Depreciation is 50,000.
Year Depreciation
(Accounting)
Depreciation
(Tax)
Difference Deferred Tax Entry Income Tax Entry
1 20,000 10,000 10,000
(Tax profit > Accounting Profit)
Deferred Tax Asset Dr----- 3,000
Deferred Tax Income Cr ---------3,000
Income Tax Expense – Dr 12,000
Provision for Tax----------Cr 12,000
2 20,000 9,000 11,000
(Tax profit > Accounting Profit)
Deferred Tax Asset Dr----- 3,300
Deferred Tax Income Cr ---------3,300
Income Tax Expense – Dr 12,300
Provision for Tax----------Cr 12,300
3 20,000 8,100 11,900
(Tax profit > Accounting Profit)
Deferred Tax Asset Dr----- 3,000
Deferred Tax Income Cr ---------3,000
Income Tax Expense – Dr 12,570
Provision for Tax----------Cr 12,570
4 20,000 7,290 12,710
(Tax profit > Accounting Profit)
Deferred Tax Asset Dr----- 3,813
Deferred Tax Income Cr ---------3,813
Income Tax Expense – Dr 12,813
Provision for Tax----------Cr 12,813
5 20,000 6,561 13,439
(Tax profit > Accounting Profit)
Deferred Tax Asset Dr----- 4,031
Deferred Tax Income Cr ---------4,031
Income Tax Expense – Dr 13,031
Provision for Tax----------Cr 13,031
6 0 5,905 5,905
(Accounting Profit > Tax Profit)
Deferred Tax Expense – Dr----1,771
Deferred Tax Asset - Cr----------1,771
Income Tax Expense – Dr 13,228
Provision for Tax----------Cr 13,228
3. Yea
r
Accounti
ng Base
Tax
Base
Temporary Difference Deferred Tax Deferred Tax Entry Income Tax Entry
1 80,000 90,000 10,000
(Tax base > Accounting base)
3000 (Asset) Deferred Tax Asset Dr----- 3,000
Deferred Tax Income Cr ---------3,000
Income Tax Expense – Dr 12,000
Provision for Tax----------Cr 12,000
2 60,000 81,000 21,000
(Tax base > Accounting base)
6,300 (Asset) Deferred Tax Asset Dr----- 3,300
Deferred Tax Income Cr ---------3,300
Income Tax Expense – Dr 12,300
Provision for Tax----------Cr 12,300
3 40,000 72,900 32,900
(Tax base > Accounting base)
9,870 (Asset) Deferred Tax Asset Dr----- 3,000
Deferred Tax Income Cr ---------3,000
Income Tax Expense – Dr 12,570
Provision for Tax----------Cr 12,570
4 20,000 65,610 45,610
(Tax base > Accounting base)
13,683 (Asset) Deferred Tax Asset Dr----- 3,813
Deferred Tax Income Cr ---------3,813
Income Tax Expense – Dr 12,813
Provision for Tax----------Cr 12,813
5 0 59,049 59,049
(Tax base > Accounting base)
17,714 (Asset) Deferred Tax Asset Dr----- 4,031
Deferred Tax Income Cr ---------4,031
Income Tax Expense – Dr 13,031
Provision for Tax----------Cr 13,031
6 0 53,144 53,144
(Tax base > Accounting base)
15,943 (Asset) Deferred Tax Expense – Dr----1,771
Deferred Tax Asset - Cr----------1,771
Income Tax Expense – Dr 13,228
Provision for Tax----------Cr 13,228
