Deferred Tax
Also called: Deferred Tax Expense
The tax effect of timing differences between book profit and IRD taxable profit, on the Profit and Loss statement. Can be a charge or a credit.
In detail
Deferred Tax is the part of the tax charge that is not payable this year but will be, or has been paid early, because the IRD and the books measure items at different times. Faster tax depreciation on the Dell laptop lowers this year's tax bill and raises later ones; the tax saved now is charged here as an expense and credited to Deferred Tax Liability so the total tax expense matches book profit. Provisions and allowances disallowed until paid work the other way and create a Deferred Tax Asset with a credit here. It is a year-end adjustment posted with the auditor's schedule and never involves a payment. NFRS accounts require it.
Formula
Deferred Tax = Change in (Temporary differences x Tax rate) during the year
Accounting entry
| Account | Debit | Credit |
|---|---|---|
| Deferred Tax | Rs 8,000 | |
| Deferred Tax Liability | Rs 8,000 |
How to record it in BRAccount
- 01List each asset and provision with its book value and its tax value at Ashadh end.
- 02Multiply the net temporary difference by the tax rate and compare with last year's balance.
- 03Go to Invoicing > Journal Entry > New dated the year end.
- 04Debit Deferred Tax and credit Deferred Tax Liability for an increase; reverse the lines for a decrease or an asset.
- 05Submit. The entry below posts and the tax note reconciles book and tax.
When to use it
Post by Journal Entry at year end with the other side in Deferred Tax Liability or Deferred Tax Assets, as your auditor computes.
Example from the demo books
Dr Deferred Tax Rs 8,000, Cr Deferred Tax Liability Rs 8,000 at Ashadh end 2084 for faster tax depreciation on the Dell laptop.