Hello, I'm professor Brian Bushee, and welcome back.
This is part two of our look at
how temporary differences create deferred tax assets and deferred tax liabilities.
It's deferred tax assets' turn, so we're going to go over that.
Plus, as a bonus feature, we'll show you what happens when the tax rate changes.
Let's get started.
Now we're going to
continue our look at temporary differences with deferred tax assets.
So, deferred tax assets arise from temporary differences where,
initially, tax rules require smaller expenses or bigger revenues than GAAP.
So again, at the beginning of the transaction that
creates the temporary difference, you initially have smaller expenses or
bigger revenues on the tax return.
Which means that pre-tax income is going to be less than taxable income,
where you have the smaller expenses or bigger revenue, and
if we have less pre-tax income, we must have less income tax expense.
because again, both income numbers get multiplied by 35%,
so income tax expense is less than income taxes payable.
We're going to create a def, deferred tax asset, which is going to
represent the benefit of tax savings that we're going to get in the future.
So, the way the journal entry would look is,
we debit income tax expense and, again, just making up numbers.
Let's make up 90 for income tax expense.
We know that's less than income taxes payable.
So we credit income taxes payable for 100, again making up numbers.
To get this to balance, we create a deferred tax asset, of 10,
that represents the fact that we paid more taxes to the government today,
but those extra payments are going to get us tax savings in the future.
The deferred tax asset is the benefit of those tax savings.