Select Your Location
The deferred tax liability and deferred tax asset are very important components of financial statements. The deferred tax brought into accounts to make a clear picture of current and future tax. It depends upon the nature of transaction whether the Company has paid the advance tax or overpaid tax will be recognized under the deferred tax asset. Whereas, when the tax expense is more compared to tax payable which are payable in the future period will be recognized under the deferred tax liability. The adjustment is made at the end of the year while finalizing the Financial Statement of the Company.
Table of Contents
There is a difference between the taxable profit
and book profit because there are certain items which are allowed or disallowed
for the tax purpose.
Here are two types of difference which are created known as timing difference it can be either:
Deferred tax is recognized through a Temporary and Permanent difference. The effect has been given in the financial statements either through deferred tax asset or deferred tax liability depending upon the nature of the transaction. Deferred tax is only recognized if there is a future possibility. It should be kept in mind that Deferred Tax Asset and Deferred Tax Liability are created only for the temporary difference because for the permanent difference it is not created as they are not going to be reserved.
It means when an asset on a Company’s balance sheet that may be used to reduce the taxable income. It refers to the situation where the Company has paid more tax or advance tax.
It means the Company has deducted the tax less
compared to tax payable and it signifies that Company may pay in future more
understand through an example
Tax Asset: The Company has a book
profit of Rs. 1500 and this includes bad debt of Rs. 500. For Tax profit, bad
debt will be allowed in the future when it is required actually to be written
off. Hence taxable income after disallowance will be Rs. 2000 and the income
tax rate is 30% then the entity will pay taxes on Rs. 2000 i.e. (2000*30%) Rs.
If the bad debts were not disallowed, the entity
would have paid tax on Rs. 1500 i.e. (1500*30%) Rs 450. For additional Rs. 150
which is already paid now and Deferred Tax Asset to be created.
Tax Liability: When the
depreciation rate per income tax is higher than the depreciation rate per
Companies Act, the entity will end up paying less tax for the current period.
This will create a deferred tax liability. It is created under the head of
The main purpose of Deferred Tax asset and Deferred
Tax Liability is to make the appropriate presentation in financial statements
and to keep the transparency so that the stakeholder aware of the tax situation
of the Company.
of items not included while calculating the Deferred Tax
A deferred tax asset or liability is not recognized if that deferred tax arises from:
calculate Deferred Tax?
Carrying amount of asset/liability – Tax base of
asset/liability= Temporary difference.
Mentioned the link for the study purpose https://www.incometaxindia.gov.in/Pages/tools/deferred-tax-calculator.aspx
The deferred tax can be brought down through this
Read Also: Salaried? You need to file Income Tax Return!
As per the Income Tax, every Company must disclose
in the financial statement the accounting treatment carried out for calculating
the Deferred Tax. By disclosing it brings transparency among the stakeholders.
Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.
Black money has been the subject of heated political debate in India for a long time. Successiv...
The Apex Court pronounced a judgement in the case titled Tata Motors Vs The Brihan Mumbai Elect...
Since economies are moving towards digitalisation and making it feasible to conduct transaction...
The Alternative Investment Funds (AIFs) Pro-rata and Pari-Passu Rights Proposal Consultation Pa...
The Financial Action Task Force, i.e. FATF (the Force), is the global money laundering and terr...
Advance tax refers to the payment of the tax liability before the end of the relevant financia...
On 11.12.15, the Hon’ble Delhi High Court (HC) pronounced a landmark judgement in the case ti...
Money laundering can be defined as the process of illegal concealment of the origin of money ob...
Every assessee in India is obligated to file an income tax return and make the timely payment o...
In the recent past, India has seen burgeoning demand for internet and smartphones. The rapid ri...
Are you human?: 5 + 2 =
Easy Payment Options Available No Spam. No Sharing. 100% Confidentiality
Blockchain adoption in banking enables banks to process payment more easily and quickly. Blockchain technology has...
12 Jan, 2020
Setting up yoga, Aerobics and Healthcare and fitness Center in India? Yoga over the ancient era, many lavish f...
04 May, 2018
Red Herring Top 100 Asia enlists outstanding entrepreneurs and promising companies. It selects the award winners from approximately 2000 privately financed companies each year in the Asia. Since 1996, Red Herring has kept tabs on these up-and-comers. Red Herring editors were among the first to recognize that companies such as Google, Facebook, Kakao, Alibaba, Twitter, Rakuten, Salesforce.com, Xiaomi and YouTube would change the way we live and work.
Researchers have found out that organization using new technologies in their accounting and tax have better productivity as compared to those using the traditional methods. Complying with the recent technological trends in the accounting industry, Enterslice was formed to focus on the emerging start up companies and bring innovation in their traditional Chartered Accountants & Legal profession services, disrupt traditional Chartered Accountants practice mechanism & Lawyers.
Stay updated with all the latest legal updates. Just enter your email address and subscribe for free!
Chat on Whatsapp
Hey I'm Suman. Let's Talk!