Accounting Questions and Answers

What is deferred tax?

Accounting profits are calculated on an accrual basis, but the tax authorities may calculate taxes on a different basis. for instance you may have accrued interest income in your statements but the tax authorities may not tax it until you receive cash. this gives rise to a difference in the tax figure calculated by you and the tax authorities. this is called a temporary difference. in this case the tax figure calculated by you will be higher than the tax actually payable. your financial statements will show the figure actually payable as tax liability, but since the accounts are to be prepared on an accrual basis you are going to make up for the shortfall by opening another account called deferred tax liability and adjusting the rest of the amount there. this reinforces the accrual principal by accounting for the related tax when the entry is recorded.