The taxes a company pays to the tax authorities does not always equal to the amount calculated on the financial statements of the company. Company’s chart out two types of financial statements – one of which is for the public and stakeholders. The other is for tax authorities which follows different set of rules set out by the taxman.
The difference between these two accounting statements leads to a different pre-tax income which ultimately leads to a different tax figures - ultimately creating either a deferred tax asset or a deferred tax liability. If the company pays more tax under tax-based accounting methodology leading to more cash outflow, then the company creates a deferred tax asset on the BS. The reverse is true for deferred tax liabilities.
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