Deferred Tax Asset (DTA) Vs Deferred Tax Liability (DTL)

  • Blog|Income Tax|
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  • 2 Min Read
  • By Taxmann
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  • Last Updated on 28 December, 2021

1. What is Deferred Tax Asset and Deferred Tax Liability ( DTA & DTL )?

The basic difference between deferred tax asset and deferred tax liability is the difference in income that is computed as per the provisions of different laws. While computing income for the purpose of calculating tax liability, the provisions of Income Tax Act, 1961 are applicable whereas while computing income for disclosure in Financial Statements principles of financial accounting is applicable. Some differences that arise due to the application of different provisions of the law are temporary differences i.e. the differences that get eliminated over a period of time. These temporary differences are accounted for, recognized, and carried forward in the books of accounts and accordingly, Deferred tax asset A/C and Deferred tax liability A/C are created.

2. Major Difference between Deferred Tax Asset and Deferred Tax Liability:-

Deferred Tax Asset

Deferred Tax Liability

1

When profits as per tax laws is more than profits as per books of accounts,

A deferred tax asset is required to be created.

1

When profits as per tax laws is less than profits as per books of accounts,

Deferred tax liability is required to be created.

2

The creation of deferred tax assets is subject to the principles of prudence.

2

Creation of deferred tax liability is subject to payment of minimum Alternative Tax (MAT)

3

Deferred Tax Asset journal entry

Deferred Tax Asset A/C……. Dr

            To Profit & Loss A/C……….

 

3

Deferred Tax liability journal entry

Profit & Loss A/C ……. Dr        To Deferred Tax Liability A/C……

 

4

It is shown under the head of Non- Current Assets in the balance sheet.

4

It is shown under the head of Non- Current Liability in the balance sheet.

It is important to mention that both the deferred tax asset and deferred tax liability are created for the temporary differences only. These differences are temporary in nature and with the time the impact of these differences gets eliminated. Further, as per deferred tax accounting standard, amount of deferred tax is not allowed to be discounted to its present value. Hence, while doing deferred tax calculation, the time value of money is ignored and therefore, the timing differences get reversed. 

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