Deferred Tax Liability Journal Entry
Deferred Tax Liability is the amount of tax that company owes to the government and has obligation to pay in the future. It happens when the income tax expense is higher than the income tax payable.
Income tax is the amount of tax that the government charge over the companies based on their annual profit. Most countries use the fixed rate to charge the income tax over the profit during the year. It sounds simple, but it is not really is.
Income tax expense is the tax expense which records on the income statement of the company. The company calculates it by multiplying the earnings before tax with the income tax rate. The earning before tax (EBT) is the company profit that complies with accounting rules. The revenue and expense follow the accrual basic and accounting depreciation. After calculation, the accountant will record the income tax expense based on this calculation and put it on the income statement.
Income tax payable is the amount that company needs to pay to the tax authority in the current accounting period. It is the company obligation to pay the tax in the current period. It is calculated by multiplying the taxable profit and income tax rate, which is the government rate. The taxable profit is the based amount that government will use to calculate income tax paid. So what is the difference between taxable profit and EBT?
Taxable profit is the profit that follows the tax law rather than the accounting rule. It arrives from revenue and expense that are recorded based on the tax law. The revenue and expense following the cash basic, tax depreciation method, and so on.
Most of the time, the income tax expense and income tax payable are always different. When income tax expense is higher than income tax payable, it will generate deferred tax liability. On the other hand, when the income tax expense is lower than income tax payable, it will credit deferred tax assets.
Deferred Tax Liability Journal Entry
After calculating the income tax expense and income tax payable, they need to record both figures into the financial statement.
The income tax expense will be present on the income statement. The income tax payable will be present on the balance sheet. Deferred tax liability will happen when income tax expense is higher than income tax payable.
Deferred tax liability = Income tax expense – Income tax payable
The journal entry is debiting income tax expense and credit income tax payable, deferred tax liability.
| Account | Debit | Credit |
| Income Tax Expense | XXXX | |
| Income Tax Payable | XXXX | |
| Deferred Tax Liability | XXXX |
Income tax expense will reduce the company profit on income statement. Income tax payable is the current obligation that company needs to pay to the tax authority after year-end closing.
Deferred tax liability will be present on the balance sheet. It will be there to offset the future income tax expense. The deferred tax liability will reduce when income tax expense is less than the income tax payable. It will happen in the future.
Deferred Tax Liability Journal Entry Example
Accountant is preparing a financial statement for the company ABC. Based on the calculation the accounting profit (EBT) is $ 50,000. The taxable profit is $ 40,000. The difference is mostly related to the depreciation method between tax and accounting. The income tax rate is 20%. Please prepare a journal entry for the deferred tax liability.
First, we have to calculate the income tax expense.
Income tax expense = accounting profit * tax rate = $ 50,000 * 20% = $ 10,000
ABC has to record income tax expenses of $ 10,000 on the income statement.
Second, we have to calculate the income tax payable.
Income tax payable = Taxable profit * tax rate = $40,000 * 20% = $ 8,000
The company needs to pay $ 8,000 to the tax authority after the year-end closing. The time is vary from one country to another.
So the income tax expense is greater than income tax payable, which leads to the deferred tax liability.
Deferred tax liability = Income tax expense – income tax payable = $ 10,000 – $ 8,000 = $ 2,000
This is the amount that company owes to the tax authority, but they will not use cash to settle. It will reverse back in the future when income tax expense is less than income tax payable.
The journal entry is debiting income tax expense $ 10,000 and credit income tax payable $ 8,000, deferred tax liability $ 2,000.
| Account | Debit | Credit |
| Income tax expense | 10,000 | |
| Income tax payable | 8,000 | |
| Deferred tax liability | 2,000 |
ABC will pay $ 8,000 during the submission of tax return. The deferred tax of $ 2,000 will remain on the balance sheet until the income tax expense is higher than tax payable in the next period.