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IAI Actuarial Core Principles · Business Finance · Personal and corporate taxation

A company's accounts show a tax expense based on accounting profit, while the tax actually payable is lower because tax depreciation exceeds accounting depreciation. What does this timing difference create in the accounts under accrual accounting principles?

It creates a deferred tax liability. Tax depreciation running ahead of accounting depreciation lowers tax now, but the difference reverses later and raises future taxable profit, so the tax is deferred rather than permanently saved.

  1. AA deferred tax liabilityCorrect
  2. BA deferred tax asset
  3. CA permanent difference needing no entry
  4. DAn increase in share capital
  5. A prior period error

Explanation

Faster tax depreciation lowers current taxable profit now but means higher taxable profit later as the difference reverses. Tax is therefore deferred, not saved, and a deferred tax liability is recognised. A deferred tax asset would arise where tax paid exceeds the accounting charge.

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