Question

1. Many times companies use accelerated depreciation on equipment for tax purposes and the straight line method for financial reporting. In such instances how, in the first year of the asset’s life, do we compute tax expense on the financial statements and how do we account for the difference between that tax expense and the income tax actually paid for the year? What happens later in the asset’s life?

Answer 1

When there is difference between depreciation as per financial statement and for tax purpose. It leads to difference between Income tax as per financial statement and income tax as per tax. If the tax expense as per tax is more than tax expense as per financial statement then the difference is shown as deffered tax income in financial statements and shown as deferred tax asset in fianancial statement and if the tax expense as per tax is less than tax expense as per financial statement then the difference is shown as deffered tax expense in financial statements and shown as deferred tax liability in fianancial statement.

The same thing happens over the assets life and deferred tax asset created in one year is set off with deferred tax liabilty in coming years.