Journal Entry for Deferred Tax Asset
Key Takeaways
- Deferred tax assets are created by differences between tax rules and accounting rules.
- They represent future tax benefits and can be utilized when there are sufficient taxable profits.
- Deferred tax assets are recorded in the general ledger through a journal entry debit income tax expense & deferred tax assets and credit income tax payable.
- Recognition of deferred tax assets is dependent on the probability of sufficient taxable profits, with the probability of realization needing to exceed 50% under IFRS.
Deferred tax assets
A deferred tax asset is an asset created by differences between tax rules and accounting rules which results in a tax benefit. This asset can arise from overpayment or advance payment of taxes and is the opposite of a deferred tax liability which represents income taxes owed.
Deferred tax assets can be recorded in a company’s general ledger by making a journal entry that credits the tax asset account and debits the corresponding income tax expense account. The amount of the journal entry should be equal to the amount of the tax benefit that is expected to be realized in future accounting periods. The journal entry should also include a description of the deferred tax asset and the source of the benefit.
The deferred tax asset should be recognized when it is certain that the benefit will be realized in the future. The journal entry should be reversed if the asset is no longer expected to be realized.
Journal Entry for Deferred Tax Asset
In this journal entry, the income tax expense is debited while a deferred tax asset is also debited. A credit goes to the income tax payable account. This type of journal entry is used to recognize potential future tax benefits that can be obtained from existing assets.
| Account | Debit | Credit |
|---|---|---|
| Income Tax Expense | xxx | |
| Deferred Tax Asset | xxx | |
| Income Tax Payable | xxx |
Recognition of deferred tax assets
The recognition of future tax benefits from existing assets or liabilities is dependent on the probability of there being sufficient taxable profits. Under International Financial Reporting Standards (IFRS), deferred tax assets are recognized when it is likely that there will be enough taxable profits to use deductible temporary differences or carry forward unused tax losses or credits. To be recognized, the probability of realization must exceed 50%.
Deferred tax assets represent future tax benefits that can be utilized when there are sufficient taxable profits. The journal entry for deferred tax assets is a debit to deferred tax assets and a credit to income tax expense.
Conclusion
When recognizing a deferred tax asset, it is important to understand that a journal entry must be made to record the asset. The journal entry should include a debit to the deferred tax asset account and a credit to the income tax payable account.
It is essential to note that the debit and credit must be equal, and the amounts must be based on the current tax rate.
A deferred tax asset is an asset that can be used to reduce future income tax payments, and recognizing it is essential for accurate financial reporting.