I’ve been breezing through FRA (second time around) until I reached income Taxes. Maybe the material is boring to me, but nothing is sticking.
DTA and DTL and thats about it. Anyone have any strategies or tips on how to make this stuff stick?
Thanks!
Simply,
when you pay more taxes as compared to your income, it become like prepaid, hence DTA created
when you pay less taxes as compared to your calculated tax on income, you have to fulfill this gap in future, hence DTL iscreated
Although it’s not a popular position, I’d encourage you to practice a bit with T-accounts: debits and credits. It makes many aspects of FRA much easier to learn and understand, not the least of which is income tax expense.
When you fill out your tax return you come up with an amount you have to pay: taxes payable. That’ll be a credit to a liability account, so you need a corresponding debit: income tax expense. The debit increases the tax expense.
Suppose that you have an increase in a DTA. That’ll give you a debit in an asset account, so you need a corresponding credit: income tax expense. The credit reduces income tax expense. A decrease in a DTA will mean a credit to the asset account, so a debit to income tax expense, increasing it.
Suppose that you have an increase in a DTL. That’ll be a credit to a liability account, so you need a corresponding debit; you guessed it: income tax expense, increasing it. A decrease in a DTL is a debit to the liability, and a credit to income tax expense, decreasing it.
The highlighted portion is the key: what happens today doesn’t matter; what happens in the future matters. If you have a future benefit (lower future taxes), that’s an asset: DTA. If you have a future detrement (higher future taxes), that’s a liability: DTL.
Hi BaseballRedhawks
You can make it easy,Think like that here is 2 apects of calculation 1 by company(Following accounting concepts and principles) and another by Income taxes(following another method which is not matching with company calculations ). For example- Depriciation is calculated by company using double declining method, because of more use of machinery in early years after purchase( $4000 depriciation amount).
But Income taxes have calculated only $2000 because they are following straight line depriciation method.So, there is difference of $2000 which are not gonna to recieve by income taxes.
In this case company make a record of $2000 in Balance sheet as a DTA, Because we haven’t recieved deduction of this amount as a expenses.
Thanks everyone! Going to work on some practice problems…
i watched this video, and it helped a little, but still confused. Thought i got it, then then i don’t.
http://www.youtube.com/watch?v=45PARid_erY
Below are a few thoughts… let me know if im way off, please
Tax payable = what you actually have to pay in taxes
Tax expense = what your accounting method says you need to be.
If Tax payable is above tax expense, then you will have a DTA. Since you paid more, then what your accounting method calculates.
Using straight line method of depreciation for reporting purposes and accelerated depreciation for taxd purposes would most likely result in.
Since accelerated depreciation will cause your income to be lower, in the beginning compared to straight line. This means that your tax payable is less than tax expense. Which would create a DTL.
I keep also confusing myself and thinking that this is a DTA. Since you will be paying more taxes than you are suposed to, since your straight line mehtod income is above the accelerated depreciation for tax purposes.
Help!
Thanks!!
_ you have to fulfill this gap in future - i think this is what im missing. _
Im sorry - i got it now. I called one of my best friends who is a tax consultant at a big 4, and has his masters in tax. he was able to explain it!
So . . . explain it to us.
Please.
Basically, he told me the magical phrase. what is favorable now, is unfavorable later. And what is unfavorable now is favorable later.
So when your reporting/book taxes (income taxes), are more than the actual taxes (taxes payable) you need to pay… that is only good now (since you’ll actually pay less taxes), but unfavorable later since you will need to pay it anyways = DTL.
He explained it to me for 15 minutes and always used debit and credits. he used a company giving salary bonuses as an example.
Another way to understand is the keywords Asset and Liability
An Asset is something you own (think of it as somthing you “paid” for. DTA - prepaid or paid in advance)
A liability is something you owe ( DTL - you are supposed to pay according to your Financial statement but you haven’t paid yet according to your income tax return)