101 Concepts for the Level I Exam

Concept 55: Deferred Tax Liabilities and Assets

Accounting profit is the pretax income from the income statement. It is based on accounting standards.

Taxable income is income subject to tax. It is based on the tax returns.

The accounting profit and taxable income are different because of differences between the accounting standards and the tax returns. For example,

Accounting profit is usually calculated using straight line depreciation. While taxable income is usually calculated using accelerated depreciation.
Accounting profit is usually based on accrual basis of accounting. While taxable income is usually based on cash-basis accounting.

Deferred tax assets are created when income tax payable is greater than income tax expense. Provided the difference is temporary and expected to reverse in future periods.

Deferred tax liabilities are created when income tax expense is greater than income tax payable. Provided the difference is temporary and expected to reverse in future periods.

Valuation allowance is a contra account to the DTA account. It is used to reduce DTA based on the probability that future tax benefits will not be realized.

Taxes payable is a liability on the balance sheet calculated using taxable income.

Income tax expense is an expense recognized in the income statement that includes taxes payable and changes in deferred tax assets and liabilities.