Deferred Tax Assets and Liabilities

Lesson

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Taxes are computed a little differently than traditional accounting books.

Tax authorities are more interested in when cash enters and leaves a company, while most accounting books are concerned with accrurals.

Sometimes there's a bit of confusion when differences between the two show up.

Sometimes a company receives cash, but hasn't earned it yet. This happens every time there is unearned revenue.

Sometimes a company completes a job, but hasn't yet received cash.

This is where deferred tax assets and deferred tax liabilities come in.

Deferred Tax Assets - When tax payable is higher than the income tax expense (it can be applied in future years to reduce taxes)
Deferred Tax Liabilities - When tax pable is lower than the income tax expense (it will be applied in future years and increase taxes)

Question

Frank inc., the upstart book importer, has an ongoing relationship with a client, and sent it a bill for services rendered of $31,000.00.

Just before the end of the year, it received payment from the client for $37,000.00. The current tax rate is 20%.

What is the tax asset or tax liability?

Answer

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👉 Answer:

There is a $1,200.00 deferred tax asset.

👨‍🎓 Here's how we arrived at the answer:

First, remember the formula for the the amount of money above (or below) the amount earned that has been paid.
EXCESS TAX OVER BOOK = TAX REVENUE - BOOK REVENUE
Now let's fill in the numbers
$6,000 = $37,000.00 - $31,000.00
Finally, multiply the excess or deficit from above by the tax rate.
DEFERRED TAX = EXCESS TAX OVER BOOK * TAX RATE
Let's plug in the numbers
$1,200.00 = $6,000 * 20%
Since the result of the above step is positive, we know that it is a deferred tax asset and not a liability.

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