Because deferred tax doesnt attempt to reconcile the difference between tax estimated and actual tax paid- it wants the tax expense to show the ENTIRE TAX FIGURE for the current period’s profit (an application of the matching concept).

For example, our profit might include dividend income not yet received. Imagine the tax on this is to be $500.
The tax authorities go through our accounts, notes this dividend income, and so deducts it from our profit because they account for dividends on a cash basis. They don’t want dividend income not yet received to taint their calculation of a tax estimate. The tax authorities therefore calculate our current year tax estimate without including the dividend income.
We receive the dividend next year. The tax authorities then again go through our accounts and say ‘okay. Dividend income received. Now we can tax it’ and so tax us $500 on it.

The problem is- the matching concept says that the income of a period must be matched against the expenses for that same period. The dividend income must therefore be matched with expenses pertaining to it i.e. the $500 tax. What deferred tax does is it takes heed of this and ensures that the matching concept applies so that this $500 expense is not deducted from income in the next period (which betrays the matching principle) and instead is rightfully deducted from the dividend income in the current period.

Comments

adityasjc says
January 6, 2021 at 2:20 pm
What is the use of deferred taxes when the difference between the tax estimate and actual tax paid can be balanced using over/underprovision of current tax?
Log in to Reply
- juliajimenez says
  March 9, 2022 at 9:58 am
  Brilliant explanations Chris !!!
  Log in to Reply
- Anonymously says
  February 6, 2026 at 1:00 pm
  Because deferred tax doesnt attempt to reconcile the difference between tax estimated and actual tax paid- it wants the tax expense to show the ENTIRE TAX FIGURE for the current period’s profit (an application of the matching concept).
  For example, our profit might include dividend income not yet received. Imagine the tax on this is to be $500.
  The tax authorities go through our accounts, notes this dividend income, and so deducts it from our profit because they account for dividends on a cash basis. They don’t want dividend income not yet received to taint their calculation of a tax estimate. The tax authorities therefore calculate our current year tax estimate without including the dividend income.
  We receive the dividend next year. The tax authorities then again go through our accounts and say ‘okay. Dividend income received. Now we can tax it’ and so tax us $500 on it.
  The problem is- the matching concept says that the income of a period must be matched against the expenses for that same period. The dividend income must therefore be matched with expenses pertaining to it i.e. the $500 tax. What deferred tax does is it takes heed of this and ensures that the matching concept applies so that this $500 expense is not deducted from income in the next period (which betrays the matching principle) and instead is rightfully deducted from the dividend income in the current period.
  Log in to Reply
Meloman says
July 25, 2020 at 10:00 am
this whole video is about why I hate taxes )
Log in to Reply
- floralin2012 says
  July 29, 2020 at 9:37 pm
  I passed tax…but when introduced definition or some calculation steps…I feel many question mark and no idea….maybe after example will feel ok….
  Log in to Reply

20% off ACCA & CIMA Books

Reader Interactions

Comments

Leave a Reply Cancel reply