Deferred Tax Asset and Liability. CPA Exam Simulation. Intermediate Accounting.
Channel: Farhat Lectures. The # 1 CPA & Accounting Courses
Date: 2020-10-11

IN this video, I explain deferred tax asset. A deferred tax asset is an asset on a company's balance sheet that may be used to reduce its taxable income. A deferred tax asset is an item on the balance sheet that results from overpayment or advance payment of taxes. It is the opposite of a deferred tax liability, which represents income taxes owed.

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In the United States, laws allow companies to maintain two separate sets of books for financial and tax purposes. Because the rules that govern financial and tax accounting differ, temporary differences arise between the two sets of books. This can result in deferred tax liability, when the amount of tax due according to tax accounting is lower than that according to financial accounting. Deferred tax liability commonly arises when in depreciating fixed assets, recognizing revenues and valuing inventories.


Differences in tax liabilities are simply temporary imbalances between a reported amount of income and its tax basis: The accounting disparities appear when there are differences between the taxable income and the pretax financial income or when the bases of assets or liabilities differ for financial accounting and tax purposes. For example, money due on a current receivable account cannot be taxed until collection is actually made, but the sale needs to be reported in the current period.


Because these differences are temporary, and a company expects to settle its tax liability (and pay increased taxes) in the future, it records a deferred tax liability. In other words, a deferred tax liability is recognized in the current period for the taxes payable in future periods.