Deferred tax is an accounting concept, meaning a future tax liability or asset, resulting from temporary differences between book (accounting) value of assets and liabilities and their tax value, or differences between the recognition of gains and losses in financial statements and their recognition in a tax computation (FASB). Deferred tax is important in understanding the financial situation of a company’s operation because it provides a more accurate calculation of accrual earnings and accurate measure of the equity position, and moderates earning by increasing the tax liability in good years and decreasing the tax liability in bad years (Todd A. Doehring). Generally, deferred tax could be deferred tax assets or deferred tax liability and a temporary difference can be either a deductible or a taxable temporary.
Deferred tax assets are the deductible amounts from taxes in the future of a business. The causes of deferred tax assets include differences caused by recognizing expenses earlier in GAAP income statement and recognizing revenues earlier in the tax returns. These differences include recognition of accrued expenses in the GAAP financial statements such as rent, utility and salaries. Recognized losses which arise due to fair value or the calculation of inventory by lower of cost or market value in the shareholders’ income statement also cause differences in income tax expense and tax payable. The recognition of advance revenues received in the tax returns and not in the shareholders’ income statement also results in differing tax amounts and causes deferred tax assets (FASB, 1992).
Deferred tax liability show account on a company's balance sheet that is a result of temporary differences between the company's accounting and tax carrying values, the anticipated and enacted income tax rate, and estimated taxes payable for the current year. This liability may