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Define in detail the following types of differences between financial accounting income and taxable income give...

Define in detail the following types of differences between financial accounting income and taxable income give multiple examples of each:

  1. Temporary
  2. Permanent
Business   Accounting   
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Answer #1
Temporary Difference This difference is due to timing gap between book income/expenses and taxable income/expense. It is temporary in nature and get reversed in future.
Example Depreciation Expenses using straight line method in books but we have different rate as per tax laws
Prepaid Expenses is booked later in books but we have tax deduction on payment itself for certain cases
Rent received in advance will be booked later in books but have to pay tax on receiving the same.
Permanent Difference This difference is not due to timing gap. It is permanent in nature and never reverse.
Example Certain penalty & fine are not allowed as per tax laws but considered in books
Interest on municipal bonds which are exempt as per tax laws but considered in books
Life insurance receipts are exempt in tax laws but considered in books
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