Accounting treatment of deferred tax
The objective of accounting for deferred tax is to ensure that the profits for the period d onto fluctuate due to temporary differences. To achieve this objective, an account called deferred tax account is prepared upon which adjustments are made at the end of every financial period.
The approach is normally to compute the temporary differences. Thereafter we apply the corporation tax rate on the temporary difference to get the balance carried down in the deferred tax account. The balance carried down is compared with the balance brought down and the difference being the balancing figure in the deferred tax account represents a transfer to or from the profit and loss or income statement.
The transfer to or from the profit and loss is not debited or credited directly in the income statement but adjustments are made on the income tax expense whose net amount will now appear in the income statement.
The final figure for income tax expense that will appear in the income statement will be arrived as follows:-
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£
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Current year estimated corporation tax
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x
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Add/(less) under cover provision of previous years tax
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x/(x)
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Add/(Less) transfer to (from) deferred tax account
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x/(x)
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Income tax expense
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xx
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In the balance sheet, deferred tax liability will be shown under NON-CURRENT LIABILTIES. Whereas a deferred tax asset will be shown under NON-CURRENT ASSETS.