Acc 423 - How Are Deferred Tax Assets and Deferred Tax Liabilities Derived?

Executive Summary

Jessica Bastien, Donna Firanski, Fred Hansen, and

Jeannine Helmig

October 2, 2011

ACC 423

Timothy Malloris

How are deferred tax assets and deferred tax liabilities derived?

To understand what a deferred tax assets and deferred tax liabilities are let us take a look at what the word deferred means. In accounting terms deferred means to that there are assets or liabilities that a company does not realize until a future date.

Deferred tax assets are on the company’s balance sheet is used to reduce any future income tax expenses. Deferred tax assets can be from a net loss that is carried over by the company into the next year as assets. An example of a deferred tax assets would be that on the balance sheet the company may have $50,000 and earn $150,000 before tax accounting income the company would apply $100,000 in accounting tax expense ($150,000 - $50,000).

With deferred tax liabilities these are future tax liabilities from a situation where taxable income can cause future financial accounting to be greater and thus will create a temporary difference between the taxable income and financial accounting. An example would be if a company has an item that is on the books for $20,000 but the taxable written down amount is for $15,000. There is now a temporary difference between the two of $5,000. So now say that the company tax rate is 30% so the company would multiply the difference of $5,000 by the tax rate of 30% which would be $1,500 in tax liability.

How do they relate to the difference between tax expense and taxes payable?

Deferred tax assets tax