Here we look in detail at temporary differences between tax authority numbers and accounting numbers.

The main reason for this temporary difference is due to different timing for the tax and accounting expenses. Maybe my accounting expense, maybe depreciation expense is spread straight line over three years, whereas my tax allowable deduction for depreciation is front loaded, it's accelerated.

This does not impact the overall cost. It's still the same amount being depreciated over the life but it does impact the payment schedule. Imagine, if my tax authorities are giving me a much higher expense in the first year. A much higher expense will reduce my profits and thus reduce the tax paid in the payment schedule. It also does not impact the ETR, the effective tax rates.

So what do I do? My tax authorities have come up with a figure that I should be paying in tax and my accounting numbers have come up with a tax expense. They're different, how can I reconcile the two? Well, this adjustment is going to be made on the balance sheet and this is where we have to create deferred taxes. So temporary differences lead to deferred taxes.

We'll create a deferred tax asset when we pay more tax earlier. So if my tax authority, tax figure is greater than my accounting tax expense, i.e. my tax payable is greater than my tax expense then that means it feels like I'm overpaying the tax. My tax expense says I should be paying maybe 100, but my tax payable is 120, it feels like I'm overpaying. Well, that means it feels like I'm paying my tax earlier than I should, in which case that's good. That creates an asset for me. Prepaid tax asset, which is your deferred tax asset. Conversely, a deferred tax liability is where we push our tax into the future. We pay it later. So if my tax payable today is less than my tax expense today, the tax payable has come from the tax calculation from the tax authorities. If that's less than the tax expense, then that means it feels like I'm underpaying what I should be. It's certainly underpaying what the tax expense on the income statement's telling me. If that means I'm gonna pay later, that's accrued tax and creates deferred tax liability.