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Given below are two statements: Statement I : Deferred Tax Liabilities (Net) is the amount of tax on the temporary difference between the accounting income and taxable income. It arises when the accounting income is more than the taxable income. Statement II : Deferred Tax Liabilities (Net) and Deferred Tax Assets (Net) are only book entries i.e. they are neither actual liability nor actual asset. In the light of the above statements, choose the correct answer from the options given below:

Given below are two statements: Statement I : Deferred Tax Liabilities (Net) is the amount of tax on the temporary difference between the accounting income and taxable income. It arises when the accounting income is more than the taxable income. Statement II : Deferred Tax Liabilities (Net) and Deferred Tax Assets (Net) are only book entries i.e. they are neither actual liability nor actual asset. In the light of the above statements, choose the correct answer from the options given below: Correct Answer Both Statement I and Statement II are true.

The correct answer is Both Statement I and Statement II are true.

Important Points Statement I : Deferred Tax Liabilities (Net) is the amount of tax on the temporary difference between the accounting income and taxable income. It arises when the accounting income is more than the taxable income.

This statement is true because

  • Deferred tax is the tax effect of timing differences.
  • Timing differences are the differences between taxable income and
  • accounting income for a period that originate in one period and are
  • capable of reversal in one or more subsequent periods
  • If accounting income is greater than taxable income, then it will result in deferred tax liability.

Statement II : Deferred Tax Liabilities (Net) and Deferred Tax Assets (Net) are only book entries i.e. they are neither actual liability nor actual asset.

This statement is true because:

  • Deferred Tax Liabilities (Net) and Deferred Tax Assets (Net) are only book entries.
  • They are just temporary differences between accounting income and taxable income.
  • They do not represent actual assets or liability.

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