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Advanced Accounting · AS 22 Accounting for Taxes on Income

AS 22 Deferred Tax Computation Problems and Journal Entries

Updated 4 October 2026 · Fact-checked

Deferred tax under AS 22 is the tax effect of timing differences between accounting profit and taxable income. To solve a problem, find the timing difference, multiply by the enacted tax rate, decide if it is a DTA or DTL, pass the entry and show tax expense as current tax plus deferred tax.

Understand Deferred Tax Computation Problems and Journal Entries

Accounting profit and taxable income are rarely equal. Some differences are permanent, such as penalties disallowed by tax law. They never reverse and create no deferred tax. Others are timing differences. They start in one period and reverse in later periods. Depreciation is the classic case.

AS 22 asks you to account for the tax effect of timing differences. If tax paid now is lower than accounting profit suggests, you owe more later. That creates a deferred tax liability (DTL). If tax paid now is higher and will be recovered later, you get a deferred tax asset (DTA).

The tax expense in the Statement of Profit and Loss is current tax plus deferred tax charge, or minus deferred tax credit. Current tax is what the tax return shows. Deferred tax is the change in the DTA/DTL balance during the year.

Prudence decides recognition. A DTL is always recognised. A DTA is recognised only when there is reasonable certainty that future taxable income will be available. If the DTA arises from unabsorbed depreciation or carried forward losses, you need virtual certainty, supported by convincing evidence. Use the tax rate and laws enacted or substantively enacted at the balance sheet date, and review unrecognised and recognised DTAs at each balance sheet date.

Typical problems add twists: a change in tax rate, losses carried forward, items taxed only when paid, and amalgamation or revaluation. Treat each twist by asking one question: is it a timing difference or a permanent difference?

Key rules to remember

Deferred tax for a timing difference
Deferred tax = Timing difference × Enacted tax rate
Use the rate enacted or substantively enacted at the balance sheet date. Compute on the cumulative difference to get the closing balance.
Timing difference for depreciation
Timing difference = Tax depreciation − Book depreciation (for the year)
A positive value (tax depreciation higher) means taxable income is lower now, giving a DTL. A negative value (book depreciation higher) gives a DTA.
Tax expense
Tax expense = Current tax + Deferred tax charge − Deferred tax credit
A DTL increase is a charge. A DTA increase is a credit.
Current tax
Current tax = Taxable income × Tax rate
Taxable income = Accounting profit ± timing differences ± permanent differences.
Closing DTL/DTA movement
Deferred tax charge for the year = Closing DTL − Opening DTL (net DTL position)
This formula applies to the net DTL position. A positive result is a charge to the Statement of Profit and Loss. For a DTA, work the other way round: if the closing DTA is higher than the opening DTA, the increase is a credit to the Statement of Profit and Loss, and a fall is a charge. If the position flips between DTL and DTA, take the movement in the net position carefully, not a simple closing-minus-opening. Also adjust for a tax rate change on the opening balance.
Recognition test
DTL: always. DTA: reasonable certainty. DTA on losses or unabsorbed depreciation: virtual certainty
Virtual certainty needs convincing evidence, not just a forecast or management's expectation.

How to solve Deferred Tax Computation Problems and Journal Entries questions

Use this order for any AS 22 problem. It keeps your workings clean and earns step marks.

  1. 1List every difference between accounting profit and taxable income. Mark each as timing or permanent.
  2. 2Ignore permanent differences for deferred tax, but include them when computing taxable income.
  3. 3Compute the timing difference for the year and the cumulative difference at year end.
  4. 4Decide DTA or DTL. Check the recognition test, especially for losses and unabsorbed depreciation.
  5. 5Multiply by the enacted tax rate. Adjust the opening balance if the rate changed.
  6. 6Find the year's charge or credit as closing balance minus opening balance.
  7. 7Compute current tax and total tax expense. Then pass the journal entries.
  8. 8Write the balance sheet disclosure: DTA and DTL are shown separately, and netted only where the law gives a legal right to set off and the taxes relate to the same taxing authority.

Quickest way: Table method for deferred tax

When to use it: Use it in multi-year depreciation or loss questions where the closing balance builds up year by year.

  1. Draw columns: Year, Book depreciation, Tax depreciation, Timing difference, Cumulative difference, Closing DTL/DTA, Charge/credit.
  2. Fill the cumulative difference first. Multiply it by the rate once to get the closing balance.
  3. Subtract the opening balance to get the year's charge or credit.
  4. For MCQs, check the direction first: tax depreciation higher means DTL, book depreciation higher means DTA. Then eliminate options with the wrong direction or wrong rate.
  5. In written answers, state the recognition reason in one line, such as virtual certainty for losses. Examiners give marks for this.

Common mistakes in Deferred Tax Computation Problems and Journal Entries

  • Creating deferred tax on permanent differences such as disallowed penalties or exempt income.

    Students treat any gap between book and tax profit as deferred tax.

    Fix: Ask whether the difference will reverse. If not, it is permanent. Use it only for current tax.

  • Recognising a DTA on carried forward losses just because future profits are expected.

    Students apply the reasonable certainty test to every DTA.

    Fix: For losses or unabsorbed depreciation, recognise a DTA only if there is virtual certainty supported by convincing evidence. Otherwise do not recognise it.

  • Computing deferred tax on the year's difference alone and calling it the closing balance.

    Students forget earlier years have already created a balance.

    Fix: Track the cumulative difference. The year's charge is closing minus opening.

  • Using the wrong tax rate or ignoring a rate change.

    The question gives several rates and students pick the first one.

    Fix: Use the rate enacted at the balance sheet date for closing balances. Remeasure the opening balance and put the effect in the profit and loss.

  • Getting the direction of the DTL/DTA wrong when depreciation differs.

    Students memorise the label rather than the logic.

    Fix: Higher tax depreciation means lower taxable profit now, so tax is deferred and you have a DTL. Book depreciation higher means a DTA.

  • Debiting or crediting the wrong account in the journal entry.

    Students forget that the Profit and Loss account carries the tax expense.

    Fix: A DTL increase is Dr Deferred Tax (Profit and Loss) and Cr DTL. A DTA increase is Dr DTA and Cr Deferred Tax (Profit and Loss).

Worked examples

Example 1

A company bought a machine for ₹10,00,000 on 1 April 2026. Book depreciation is ₹2,00,000 per year. Tax depreciation is ₹4,00,000 in year 1 and ₹3,00,000 in year 2. Profit before depreciation and tax is ₹12,00,000 in each year. Tax rate is 30%. Compute current tax, deferred tax and tax expense for both years, and pass entries. Assume no other differences.

Show the solution
  1. Year 1 timing difference = Tax depreciation ₹4,00,000 − Book depreciation ₹2,00,000 = ₹2,00,000. The value is positive, so a DTL arises.
  2. Year 1 accounting profit = ₹12,00,000 − ₹2,00,000 = ₹10,00,000. Taxable income = ₹12,00,000 − ₹4,00,000 = ₹8,00,000.
  3. Year 1 current tax = 30% × ₹8,00,000 = ₹2,40,000.
  4. Year 1 DTL = 30% × ₹2,00,000 = ₹60,000. Opening is nil, so the charge is ₹60,000.
  5. Year 1 tax expense = ₹2,40,000 + ₹60,000 = ₹3,00,000, which is 30% of ₹10,00,000.
  6. Year 2 timing difference = ₹3,00,000 − ₹2,00,000 = ₹1,00,000. Cumulative difference = ₹3,00,000.
  7. Year 2 closing DTL = 30% × ₹3,00,000 = ₹90,000. Charge = ₹90,000 − ₹60,000 = ₹30,000.
  8. Year 2 taxable income = ₹12,00,000 − ₹3,00,000 = ₹9,00,000. Current tax = ₹2,70,000.
  9. Year 2 tax expense = ₹2,70,000 + ₹30,000 = ₹3,00,000.
  10. Current tax entry, Year 1: Dr Profit and Loss (Current tax) ₹2,40,000; Cr Provision for Tax ₹2,40,000. Deferred tax entry, Year 1: Dr Deferred Tax (Profit and Loss) ₹60,000; Cr Deferred Tax Liability ₹60,000. Deferred Tax is a Profit and Loss line.
  11. Current tax entry, Year 2: Dr Profit and Loss (Current tax) ₹2,70,000; Cr Provision for Tax ₹2,70,000. Deferred tax entry, Year 2: Dr Deferred Tax (Profit and Loss) ₹30,000; Cr Deferred Tax Liability ₹30,000. Deferred Tax is a Profit and Loss line.

Answer: Year 1: current tax ₹2,40,000, deferred tax ₹60,000, tax expense ₹3,00,000. Year 2: current tax ₹2,70,000, deferred tax ₹30,000, tax expense ₹3,00,000. DTL at the end of Year 2 is ₹90,000.

Example 2

In 2026-27 a company has accounting profit of ₹5,00,000 after charging ₹40,000 for a penalty (disallowed under tax law) and ₹1,00,000 of provision for warranty (allowed for tax only when paid). Tax rate is 25%. Compute current tax, deferred tax and tax expense. Pass the entry for deferred tax.

Show the solution
  1. The penalty is a permanent difference. It is added back for taxable income but creates no deferred tax.
  2. The warranty provision is a timing difference. Tax deduction comes later, when paid. So it creates a DTA.
  3. Taxable income = ₹5,00,000 + ₹40,000 + ₹1,00,000 = ₹6,40,000.
  4. Current tax = 25% × ₹6,40,000 = ₹1,60,000.
  5. DTA = 25% × ₹1,00,000 = ₹25,000. Opening is nil, so this is a credit of ₹25,000. Assume reasonable certainty of future taxable income.
  6. Tax expense = ₹1,60,000 − ₹25,000 = ₹1,35,000.
  7. Check: tax expense = 25% × (₹5,00,000 + ₹40,000) = 25% × ₹5,40,000 = ₹1,35,000. The timing difference drops out. Only the permanent difference (the penalty) remains, so tax expense is 27% of the accounting profit of ₹5,00,000, not 25%. The permanent difference raises the effective rate above 25%.
  8. Deferred tax entry: Dr Deferred Tax Asset ₹25,000; Cr Deferred Tax (Profit and Loss) ₹25,000. Deferred Tax is a Profit and Loss line.
  9. Current tax entry, kept separate: Dr Profit and Loss (Current tax) ₹1,60,000; Cr Provision for Tax ₹1,60,000.

Answer: Current tax is ₹1,60,000. Deferred tax is a credit of ₹25,000, giving a DTA. Tax expense is ₹1,35,000, which equals 25% × (₹5,00,000 + ₹40,000). It is above 25% of accounting profit because of the permanent difference.

Exam tips

  • Always show the timing difference and cumulative balance in a table. Even if the final figure is wrong, you earn step marks.
  • Check the question for words like virtual certainty, convincing evidence or reasonably certain. They signal that recognition is being tested, not only computation.
  • Read for rate changes. Remeasure the opening DTL/DTA at the new enacted rate and take the effect to profit and loss.
  • In MCQs, decide DTA or DTL by direction before calculating. This removes two options quickly.
  • Write the journal entry with the correct narration and show the tax expense as current tax plus or minus deferred tax.

Practice questions from AS 22 Accounting for Taxes on Income

Deferred Tax Computation Problems and Journal Entries in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Deferred Tax Computation Problems and Journal Entries: frequently asked questions

What is the difference between a timing difference and a permanent difference?

A timing difference arises in one period and reverses in later periods, for example depreciation or provisions allowed on payment. A permanent difference never reverses, for example a disallowed penalty. Only timing differences create deferred tax.

When can I recognise a deferred tax asset on losses?

Only when there is virtual certainty, supported by convincing evidence, that sufficient future taxable income will be available. A forecast of profits alone is not enough. Otherwise you do not recognise the asset.

Is deferred tax computed on the year's difference or the cumulative difference?

The closing balance is computed on the cumulative timing difference. The charge or credit in the Statement of Profit and Loss is the closing balance minus the opening balance.

Which tax rate do I use for deferred tax?

Use the rate enacted or substantively enacted at the balance sheet date. If the rate changes, remeasure the opening balance and recognise the effect in the profit and loss for the year.