DEFERRED TAX Meaning and
Definition
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Deferred tax is a financial accounting term referring to a liability or asset that arises due to temporary differences between the reported book value of an asset or liability and its taxable value, resulting in unequal amounts of tax expense in current and future taxation periods.
When the taxable income of a company is different from its accounting income due to timing differences, a deferred tax liability or asset is created. Timing differences occur when transactions or events are recognized in financial statements and tax returns in different accounting periods. For instance, if a company depreciates an asset at a different rate for tax purposes compared to its financial statements, a deferred tax liability or asset will be recorded to account for the discrepancy.
A deferred tax liability arises when the taxable value of an asset or liability exceeds its reported value on the financial statements. This means that the company will have to pay more taxes in the future when the asset is realized or the liability is settled. In contrast, a deferred tax asset arises when the reported value exceeds the taxable value, allowing the company to use the excess as a deduction from future taxes.
Deferred tax is recognized in accordance with the principles of accrual accounting, requiring companies to match expenses and revenues with the accounting period in which they occur rather than when cash is exchanged. It is an important concept in financial reporting, ensuring that taxes are accurately recorded and reflecting the economic substance of transactions.
Etymology of DEFERRED TAX
The etymology of the word "deferred tax" can be broken down as follows:
1. Deferred: The word "deferred" comes from the Latin word "deferre", which means "to carry away" or "to postpone". It is formed from the combination of the prefix "de-", meaning "down" or "away", and "ferre", meaning "to carry".
2. Tax: The word "tax" comes from the Latin word "taxare", which means "to evaluate" or "to assess". It is derived from the verb "tangere", meaning "to touch".
Combining these two elements, "deferred tax" refers to the postponement or delay of an evaluation or assessment of taxable income or a corresponding tax liability.
