Deferred Tax Assets and Liabilities

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)