IT EXP = TAXES PAYABLE + DELTA DTL – DELTA DTA. Please explain why we we’re doing the changes in DTA & DTL.
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So first of all understand the concept of Deferred tax assets and Deferred tax liability.
Deferred tax assets:-
It is created when income tax payable is temporarily greater than income tax expenses
Ex:- For financial reporting purposes you calculate depreciation by double declining method but income tax authority calculate depreciation by using straight line method so in earlier year the amount of depreciation will be low so they charge higher amounts of tax but i know that in future it is going to reverse because total depreciation under both the method is same so we will create the DTA
Deferred tax liability:-
It is created when the income tax expense is greater than income tax payable
Ex:- Suppose for financial reporting purposes you calculate depreciation using the straight line method but for income tax purposes the income tax authority calculate depreciation using the double declining method so they will charge higher depreciation in the starting year but in future it is expected to reverse so we will create Deferred tax liability
So income tax expenses is simply what is what you are going to pay this year i.e tax payable then the amount of liability that you will pay because of temporarily difference and you will get the benefit of DTA because of higher tax rate in the earlier year so we use this formula
DTL and DTA arise because of the temporary difference between Taxable income and PBT
DTL = liability ana vali hai like accelerated depreciation
DTA = bad mai mila ga mujhe eska benefit like warranty
According to prudence principle we recogrnized the liability and not asset