Deferred tax

A company may enter into transactions in the current financial period that may result in the firm either paying or saving some tax in the future. The tax that may be paid or saved in the future is called deferred tax that may be paid in the future is called deferred tax liability whereas tax that may be saved in the future is called deferred tax asset.

Previously accountants used to compute deferred tax using the income statement approach. Under this approach, the difference between profit before tax and taxable profits was simply referred to as a difference. This difference was classified into permanent and temporary timing differences.

Permanent differences related to those items that are adjusted for tax in the current year and will never be adjusted for tax in the future  E.g. Donations to political parties.