deferred tax liabilities

Examples of deferred tax liabilities in the following topics:

• Effects of GAAP on the Income Statement

  • Although most of the information on a company's income tax return comes from the income statement, there often is a difference between pretax income and taxable income.
  • These differences are due to the recording requirements of GAAP for financial accounting (usually following the matching principle and allowing for accruals of revenue and expenses) and the requirements of the IRS's tax regulations for tax accounting (which are more oriented to cash).
  • Such timing differences between financial accounting and tax accounting create temporary differences.
  • For example, rent or other revenue collected in advance, estimated expenses, and deferred tax liabilities and assets may create timing differences.
  • The historical cost principle: It requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities.

• Balance Sheets

  • A standard balance sheet has three parts: assets, liabilities, and ownership equity; Asset = Liabilities + Equity.
  • A standard company balance sheet has three parts: assets, liabilities, and ownership equity.
  • Assets are followed by the liabilities.
  • According to the accounting equation, net worth must equal assets minus liabilities.
  • The small business's equity is the difference between total assets and total liabilities.

• Terminology of Accounting

  • Important terminology in accounting includes cash vs. accrual basis, assets, liabilities, and equity.
  • Accrual accounts include, among others, accounts payable, accounts receivable, goodwill, deferred tax liability and future interest expense.
  • A liability is defined by the following characteristics:
  • In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets after all liabilities are paid.
  • If liability exceeds assets, negative equity exists.

• How Business Activities Affect the Balance Sheet

  • As an example of a business activity that would affect liabilities, let us once again consider a company who purchases inventory.
  • Because liabilities are on the right side of the balance sheet equation, this makes for an actual decrease on the balance sheet itself.
  • Another example of a business activity affecting liabilities would be the issuance of corporate bonds.
  • Formally, shareholders' equity is part of the company's liabilities: they are funds "owing" to shareholders (after payment of all other liabilities).
  • Usually, however, "liabilities" is used in the more restrictive sense of liabilities excluding shareholders' equity.

• Pro Forma Balance Sheet

  • The pro forma models the anticipated results of the transaction, with particular emphasis on the projected cash flows, net revenues and (for taxable entities) taxes.
  • Formally, shareholders' equity is part of the company's liabilities: they are funds "owing" to shareholders (after payment of all other liabilities).
  • Usually, however, "liabilities" is used in the more restrictive sense of liabilities excluding shareholders' equity.
  • The balance of assets and liabilities (including shareholders' equity) is not a coincidence.
  • In this sense, shareholders' equity by construction must equal assets minus liabilities, and are a residual.

• Other Current Liabilities: Sales Tax, Income Tax, Payroll, and Customer Advances

  • Other current liabilities reported on the balance sheet are sales tax, income tax, payroll, and customer advances (deferred revenue).
  • The sales tax payable account is reported in the current liability section of the balance sheet until the tax is paid.
  • If the book-tax difference is carried over more than a year, it is referred to as a deferred tax.
  • Future assets and liabilities created by a deferred tax are reported on the balance sheet.
  • According to the revenue recognition principle, the deferred amount is recorded as a liability until delivery is made, at which time it is converted into revenue.

• Overview of Income Tax Accounting

  • In order to properly account for income taxes, it is important to understand that the Internal Revenue Service code that governs accounting for tax liability isn't the same as the generally accepted accounting principles (GAAP) for reporting tax liability on the financial statements.
  • Also, the actual amount of tax liability due to the IRS may not be the same as the income tax expense reported on the income statement.
  • In this method, the deferred income tax amount is based on tax rates in effect when the temporary differences originated.
  • In the asset-liability method, deferred income tax amount is based on the expected tax rates for the periods in which the temporary differences reverse.
  • Summarize how to account for deferred taxes under the deferred method and the asset-liability method

• Unearned and Deferred Revenues

  • A deferred item, in accrual accounting, is any account where a revenue or expense, recorded as an liability or asset, is not realized until a future date (accounting period) or until a transaction is completed.
  • Examples of deferred items include annuities, charges, taxes, income, etc.
  • If the deferred item relates to revenue (cash has been received), it is carried as a liability.
  • Since the seller has received full payment for all 12 issues that will be delivered over the course of the year, the payment is recorded as unearned or deferred revenue in the current liability section of the balance sheet.
  • If cash received is for benefits that extend past the current accounting period, a long-term liability would be recorded instead.

• Differences Between Accrued and Deferred Expenses

  • An accrued expense is a liability that represents an expense that has been recognized but not yet paid.
  • So the associated expense must be listed as a liability to be paid at some point in the future.
  • Deferred expense is generally associated with service contracts that require payment in advance.
  • So the business will record a $12,000 deferred expense asset.
  • Accrued and deferred expenses are both listed on a company's balance sheet.

• Defining Liabilities

  • A liability is defined by the following characteristics:
  • Types of liabilities found on a company's balance sheet include: current liabilities like notes payable, accounts payable, interest payable, and salaries payable.
  • Liabilities can also include deferred revenue accounts for monies received that may not be earned until a future accounting period.
  • An example of a deferred revenue account is an annual software license fee received on January 1 and earned over the course of a year.
  • For the current fiscal year, the company will earn 5/12 of the fee and the remaining amount (7/12) stays in a deferred revenue account until it is earned in the next accounting period.