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Create a numerical example of a temporary tax difference.

Create a numerical example of a temporary tax difference.

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Answer : An example of a temporary difference is rental income. Accrual accounting will only allow revenue to be recorded when it is earned, but if a company receives an advance payment of rental income, it must report this under taxable income on its tax return. Thus, this revenue will be recorded on the tax return but not the book income. This creates a temporary difference in this period. At a future period when the rental revenue is finally earned, the company will record that revenue under book income but not on its tax return, thereby reversing and eliminating the initial difference.

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