Can anyone explain what is really meant by a Deferred Tax Asset and a Deferred Tax Liability. I have tried and i am just not able to understand the concept in a practical sense.
Financial statement profit and taxable profit are not always the same. Sometimes those differences are due to timing. For instance, an expenditure may be a deduction on the F/S in year 1, but a deduction on the tax return in year 2. For year 1, the income tax expense on the F/S would be less than the amount shown on the tax return because the pre-tax profit on the F/S is less. The difference is booked to a deferred asset account at the end of year 1. In year 2, the deferred tax asset account is relieved (credited) as that timing difference is cancelled.