Deferred tax is an entry that is related to the amount of tax that the company owes or overpays as a result of temporary differences. This may arise from the difference in the frequency of accounting treatment of depreciation and the taxation treatment of capital expenditure. If it is a positive entry, then it is an asset of the company. If it is a negative balance, in contrast, it will fall under the category of the company’s liability.
One may divide the deferred tax into two different categories, which are the deferred tax assets or deferred tax liability. They reflect the positive or negative amounts of tax the company owes, and they will appear on the company’s balance sheet. However, both of them will not show up at the same time. This means that on the balance sheet, one will only see either deferred tax assets or deferred tax liabilities.
To determine whether the amount is an asset or a liability, business owners need to identify whether they have overpaid the tax or owed the tax. The calculation related to deferred tax can be quite complicated sometimes as this may be associated with capital allowances, which is not something easy to deal with. Thus, if you are one of the business owners who do not know anything related to this, why not consider hiring an accounting firm in Johor Bahru? The professionals will be able to help you with the accounting tasks so that you can run your core business operations without having to worry about your books of accounts.
When it comes to deferred tax, an important concept that you need to understand is the temporary taxable differences. Such a situation will arise when the current taxable value of an asset is not the same as the liability associated with it. This is often due to the differences between the accounting approaches the company has taken to handle depreciation of assets and the tax laws related to depreciation. As a result, these differences bring an impact on the company’s account as the company’s income and expenses will appear in a particular accounting period, while the taxes payable (Also see Everything To Know About The Accounts Payable Process) will show up in another period.
The taxable difference can be deductible or taxable. In a case where the company overpays the taxes (Also see Impact of Poor Bookkeeping on Taxes), the amount overpaid will be its deferred tax asset. This is because one may take the overpayment as an asset. Thus, in the following accounting period, the company will obtain some tax break. On the other hand, in the case where the sum of income of a company is less than the taxable income in an accounting period, the accountants will record the difference as a liability on the balance sheet. This means that the business should pay for that amount in the future. Business owners should handle issues related to taxes with care if they do not want themselves to get into hot soup due to taxation issues. To avoid problems associated with taxes, they need to ensure that they have understood the rules and regulations that are related to tax filing. Otherwise, they may consider engaging a taxation service in Johor Bahru too.