Resolved: How to account for deferred tax
Hi,
I'd like to know how would a deferred tax liability be recorded both when it is incurred and when it is settled. Would it be something like:
Dbt: Accrued expenses
Crt: Deferred tax liabilities
Then
Dbt: Deferred tax liabilities
Crt: Cash
?
Thanks
2 answers ( 1 marked as helpful)
Hi Jacobo,
Your proposed journal entries capture the concept of recording and settling a deferred tax liability, but they need some adjustments to reflect the correct accounts typically involved in such transactions. Here's how it would generally work:
When the Deferred Tax Liability is Incurred:
A deferred tax liability arises when there is a temporary difference between the book value of an asset or liability and its tax base that will result in taxable amounts in future periods. The correct journal entry would be:
Debit: Income Tax Expense
Credit: Deferred Tax Liability
This entry recognizes that the company owes additional taxes in the future due to the temporary difference.
When the Deferred Tax Liability is Incurred:
A deferred tax liability arises when there is a temporary difference between the book value of an asset or liability and its tax base that will result in taxable amounts in future periods. The correct journal entry would be:
Debit: Income Tax Expense
Credit: Deferred Tax Liability
This entry recognizes that the company owes additional taxes in the future due to the temporary difference.
When the Deferred Tax Liability is Settled:
When the temporary difference reverses (e.g., the book value aligns with the tax base), the company will have to pay taxes. At that point, the deferred tax liability is settled, and the corresponding journal entry would be:
Debit: Deferred Tax Liability
Credit: Income Tax Expense (or Cash, depending on whether the settlement is through payment or by reducing income tax expense)
This entry effectively reverses the liability and recognizes the expense or outflow associated with settling the deferred tax liability.
When the temporary difference reverses (e.g., the book value aligns with the tax base), the company will have to pay taxes. At that point, the deferred tax liability is settled, and the corresponding journal entry would be:
Debit: Deferred Tax Liability
Credit: Income Tax Expense (or Cash, depending on whether the settlement is through payment or by reducing income tax expense)
This entry effectively reverses the liability and recognizes the expense or outflow associated with settling the deferred tax liability.
Best,
365 Team
Thank you for clarifying which are the correct accounts involved in these kind of transactions.