Deferred tax arises from temporary differences between accounting profit and taxable profit. Temporary differences occur when income or expenses are recognized in different periods for accounting and tax purposes. Deferred tax assets arise when accounting profit is less than taxable profit, and deferred tax liabilities arise when accounting profit is greater than taxable profit. The document provides an example to illustrate deferred tax calculations over 6 years for an office equipment asset with different depreciation methods between accounting (straight line) and tax (reducing balance). It shows the annual temporary differences, deferred tax impact, and accounting entries for deferred tax and income tax.

1. Deferred Tax
Income Statement
Approach
Balance Sheet Approach
It arises from the timing/temporary
difference between Accounting book and Tax
return in recognizing income and expenses.
Tax Profit > Accounting Profit
= Deferred Tax Asset
Accounting Profit > Tax Profit
= Deferred Tax Liability
Tax Base > Accounting Base
= Deferred Tax Asset
Accounting Base > Tax Base
= Deferred Tax Liability
*In case of Base of Liabilities, the amount shall be considered in negative figure. Thus, ‘0’ is greater than ‘-10,000’.

2. Example: Depreciation
An Office Equipment has been Purchased at cost of 100,000 and depreciated in straight line basis. Suppose, For Tax
purpose, reducing Balance method depreciation of 10% is used. Consider Profit Before tax and Depreciation is 50,000.
Year Depreciation
(Accounting)
Depreciation
(Tax)
Difference Deferred Tax Entry Income Tax Entry
1 20,000 10,000 10,000
(Tax profit > Accounting Profit)
Deferred Tax Asset Dr----- 3,000
Deferred Tax Income Cr ---------3,000
Income Tax Expense – Dr 12,000
Provision for Tax----------Cr 12,000
2 20,000 9,000 11,000
(Tax profit > Accounting Profit)
Deferred Tax Asset Dr----- 3,300
Deferred Tax Income Cr ---------3,300
Income Tax Expense – Dr 12,300
Provision for Tax----------Cr 12,300
3 20,000 8,100 11,900
(Tax profit > Accounting Profit)
Deferred Tax Asset Dr----- 3,000
Deferred Tax Income Cr ---------3,000
Income Tax Expense – Dr 12,570
Provision for Tax----------Cr 12,570
4 20,000 7,290 12,710
(Tax profit > Accounting Profit)
Deferred Tax Asset Dr----- 3,813
Deferred Tax Income Cr ---------3,813
Income Tax Expense – Dr 12,813
Provision for Tax----------Cr 12,813
5 20,000 6,561 13,439
(Tax profit > Accounting Profit)
Deferred Tax Asset Dr----- 4,031
Deferred Tax Income Cr ---------4,031
Income Tax Expense – Dr 13,031
Provision for Tax----------Cr 13,031
6 0 5,905 5,905
(Accounting Profit > Tax Profit)
Deferred Tax Expense – Dr----1,771
Deferred Tax Asset - Cr----------1,771
Income Tax Expense – Dr 13,228
Provision for Tax----------Cr 13,228

3. Yea
r
Accounti
ng Base
Tax
Base
Temporary Difference Deferred Tax Deferred Tax Entry Income Tax Entry
1 80,000 90,000 10,000
(Tax base > Accounting base)
3000 (Asset) Deferred Tax Asset Dr----- 3,000
Deferred Tax Income Cr ---------3,000
Income Tax Expense – Dr 12,000
Provision for Tax----------Cr 12,000
2 60,000 81,000 21,000
(Tax base > Accounting base)
6,300 (Asset) Deferred Tax Asset Dr----- 3,300
Deferred Tax Income Cr ---------3,300
Income Tax Expense – Dr 12,300
Provision for Tax----------Cr 12,300
3 40,000 72,900 32,900
(Tax base > Accounting base)
9,870 (Asset) Deferred Tax Asset Dr----- 3,000
Deferred Tax Income Cr ---------3,000
Income Tax Expense – Dr 12,570
Provision for Tax----------Cr 12,570
4 20,000 65,610 45,610
(Tax base > Accounting base)
13,683 (Asset) Deferred Tax Asset Dr----- 3,813
Deferred Tax Income Cr ---------3,813
Income Tax Expense – Dr 12,813
Provision for Tax----------Cr 12,813
5 0 59,049 59,049
(Tax base > Accounting base)
17,714 (Asset) Deferred Tax Asset Dr----- 4,031
Deferred Tax Income Cr ---------4,031
Income Tax Expense – Dr 13,031
Provision for Tax----------Cr 13,031
6 0 53,144 53,144
(Tax base > Accounting base)
15,943 (Asset) Deferred Tax Expense – Dr----1,771
Deferred Tax Asset - Cr----------1,771
Income Tax Expense – Dr 13,228
Provision for Tax----------Cr 13,228