Future tax effect of temporary differences between accounting amounts and tax amounts recognized under the relevant framework.
Deferred tax is the future tax effect of temporary differences between accounting amounts and tax amounts. It appears as a deferred tax asset or deferred tax liability when the timing of accounting recognition differs from the timing of tax recognition.
Deferred tax affects both the balance sheet and tax expense in the income statement. It helps readers understand that current-period accounting profit and current-period taxable profit are not always measured on the same basis.
Deferred tax often arises when depreciation methods differ between accounting and tax reporting, when revenue is recognized in different periods, or when certain expenses are recognized for accounting before they become deductible for tax purposes.
Accountants evaluate whether the difference will create future taxable amounts or future deductible amounts. That judgment determines whether the balance is recorded as a deferred tax liability or asset.
Suppose accounting depreciation for an asset is 20,000, but tax deductions for the same period are 30,000. The business has 10,000 less taxable income now than accounting income. At a 25 percent tax rate, that temporary difference creates a deferred tax liability of 2,500 because some tax has effectively been postponed to a later period.
Deferred tax is not the same as current tax payable. It does not mean cash tax is being paid immediately. It is an accounting recognition of future tax consequences tied to temporary differences.