Why are Deferred Income Taxes an Asset

We know that the income tax for company is the indirect expense like other expenses because company is different from shareholders. In individual business, income tax is personal liability, so we do not show the income tax as expense in individual business's profit and loss account.



But in the company business, we show it as business expense.

 There are two reasons behind showing deferred income tax as an asset.

1. First Reason :  Our Depreciation is less than the Depreciation Charged by Income Tax Department 

If we have charged less depreciation, it means, we have shown more income and we have paid more income tax. But if the depreciation as per income tax law, will be more, then it means, our net profit will become less,  we have to pay less income tax. So, we have to take some amount from income tax department. So, this deferred income will be our asset. See its example at here.

2nd Reason : Advance Income Tax Paid 

Every advance expense will not show in our income statement as expense. We show it as advance expense in the asset side of balance sheet. In India, company has to pay advance income tax before actual dates of total income tax on the basis of self assessment. So, this advance income tax will be deferred income tax and will show as asset in the balance sheet of company.

Following advance tax will be shown as current asset before actual payment of tax liability in assessment year. At that time, we will pass the entry. Debit the income tax and credit the advance income tax.



Related : Valuation of Account of Deferred Tax Asset 

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Accounting Education: Why are Deferred Income Taxes an Asset
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