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My concept of permanent difference is that whenever an item of income and expense( note that both the items relate to profit or loss) is not allowed for tax purposes than this creates a permanent difference between the accounting and the tax base. Last week one of my friend told me that his concept of permanent difference is that, ”permanent difference exists when an asset and its related expense both are not allowed for tax purposes”. So his explanation of the concept has created a doubt in my mind. Kindly explain the concept of permanent difference.Also tell that whether the permanent difference only relates to profit or loss or it also relates to balance sheet as well.Kindly explain this issue…..??
Hi,
Your understanding of permanent differences is correct, so do not worry. Although it is not formally defined in the standard it is essentially when no deferred tax arises. As you say this is when the item’s expense or income is not allowable for tax purposes, with the most common example being client entertaining.
The key with these so called permanent differences is that there is no deferred tax that arises.
Thanks
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