Question

In which case prepaid insurance result in less expenses on the income statement in preparing the temporary difference and deferred tax?

Answer 1

Prepaid insurance refers to insurance paid in advance for a period extending the financial year dates. In this case, only that portion of the insurance is shown in the current year income statement as expense that pertains to the period under consideration. The balance i.e. pertaining to future years is shown as current asset in the balance sheet. This results in less expense on the income statement altough the cash outflow is higher. For tax purposes, the expense is deductible when it is paid. The taxable income then is less than the accounting income which will create a temporary difference. This results in deferred tax liability and a future taxable amount.