The Deferred Income Tax – Chapter 1

In the accounting work of enterprises, there is often a difference between the amount of corporate income tax according to accounting and the amount of corporate income tax according to the tax authorities. The reason is that the basis of recognition, or the principles of income recognition and expense recognition, are different between accounting and taxation.

To solve this difference in accounting, we use the account “Deferred corporate income tax” as an accounting tool.

Today, in the chapter 1 on "Deferred corporate income tax", let's get an overview of deferred corporate income tax through the following 3 contents:

First: What is the deferred corporate tax?

Deferred corporate income tax can be understood as the amount of corporate income tax incurred in this period but deferred to the following periods, or vice versa, it is recognized that the tax must be paid in this period according to the tax law, but tax payment will be incurred in the next period according to the accounting law.

Second: Content to study about deferred corporate income tax in accounting:

In the accounting work, we recognize that "Deferred corporate income tax" when incurred will have an impact on two aspects in the financial statements:

The angle of business performance reporting;

The angle of balance sheet.

From the perspective of reporting business results:

We have,

• Corporate income tax expense (accounting) = Accounting profit before tax x tax rate.
• Corporate income tax expense (taxation) = Taxable income x tax rate

In the above two formulas, the difference is:

+ Accounting profit before tax according to accounting law.

+ Taxable income according to taxation law.

It is the duty of the accountant to reflect the above-mentioned difference in the account for recognition in the income statement.

From the perspective of balance sheet:

Studying "Deferred corporate income tax" from the balance sheet perspective, we need to understand the following two contents:

• Permanent difference is the difference arising when incomes and expenses are recognized for accounting purposes but not included in income and expenses when determining taxable income.
• A temporary difference is the difference between the book value of an asset or liability in the Balance Sheet and the tax base of that asset or liability. There are two types of temporary differences: deductible temporary differences and taxable temporary differences, specifically:

+ Deductible temporary difference: is a difference that gives rise to deductions in determining future taxable income, reduces future tax liabilities, and generates a “deferred income tax assets”.

• Taxable temporary difference: is a difference that generates taxable income when determining future taxable income, increases future tax obligations and generates "deferred income tax liabilities".

It is the duty of accountants to reflect the above-mentioned differences through accounts for recognition in the balance sheet.

Third: Common deferred corporate income tax situations:

Understanding the concept, nature, and causes of "deferred corporate income tax" will be difficult to understand. In reality, we only need to know the following five cases:

1. Difference in the period of depreciation of fixed assets;
2. Unrealized revenue incurred in transactions of selling goods or providing services;
3. Unused tax losses;
4. Future tax rate changes;
5. Deferred income tax incurred in consolidated financial statements.