Financial accounting and tax principles - CIMA
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It is important to understand how to account for taxation, because it has an impact on the income statement (in the tax expense account) and the balance sheet (in the income tax and deferred tax accounts). The tax expense on the income statement has three components: the tax charge for the period; any under- or over-provision of tax for the previous period; and the increase or decrease in the deferred tax provision. Let’s focus here
on the third component.
Before addressing how to account for deferred tax, you should know what it is and how it arises. The tax charge is calculated on
a company’s taxable profit, not its accounting profit. These two figures are rarely the same, as there will be some expenses included in arriving at the accounting profit that are not
allowed as a deduction from taxable profit. In the UK, for example, entertaining customers is not an allowable tax deduction against
profit, so that amount is added back to the accounting profit to arrive at the taxable profit. Differences that are never allowable are known as permanent differences. But some aren’t permanent, because they are allowed as a deduction against taxable profit in a different period from which they are deducted from the accounting profit. These are called temporary differences, as they will reverse in future and give rise to deferred tax.
The most common example is depreciation: a temporary difference arises because the rate of depreciation given for accounting
purposes is usually slower than the rate of depreciation given for tax purposes.

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Note added at 1 day43 mins (2015-02-11 18:09:18 GMT)
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