Introduction to Deferred Taxes — Intermediate Accounting

How do deferred taxes work under GAAP, and why do companies keep two sets of books? This lesson introduces accounting for income taxes for CPA Exam FAR candidates and intermediate accounting students, explaining book-tax differences, deferred tax liabilities, and deferred tax assets from the ground up.
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Video Timeline & Key Concepts:
0:00 — Introduction
1:06 — The core conflict: GAAP (investors/creditors) vs. IRS (taxing authority) and why financial income differs from taxable income
13:13 — Deferred Tax Liability (DTL): the accounts receivable example — pay less tax now, more later
20:04 — Deferred Tax Asset (DTA): a future tax benefit (e.g., unearned revenue)
26:38 — Journal entries: recording income tax expense with income taxes payable and changes in DTL/DTA
37:57 — Key takeaway: deferred taxes keep the income statement comparable across periods
Frequently Asked Questions:
Why do companies maintain two sets of books for income taxes?
Financial reporting follows GAAP, which is designed to inform investors and creditors, while tax reporting follows the Internal Revenue Code, which is designed to determine taxes owed. Because the two rule sets recognize revenues and expenses on different timing, financial income and taxable income differ, requiring deferred tax accounting to reconcile them.
What is a deferred tax liability?
A deferred tax liability arises when a temporary difference causes a company to pay less tax now but expect to pay more in the future. A common example is revenue recognized early for GAAP but taxed later when cash is collected, creating a future tax obligation.
What is a deferred tax asset?
A deferred tax asset represents a future tax benefit, occurring when a company pays taxes now that will reduce future tax burdens. Unearned revenue is a classic example, where cash is taxed on receipt but recognized as revenue for GAAP in a later period.
How is income tax expense recorded?
Income tax expense is recorded as a combination of income taxes payable and the change in the deferred tax liability or deferred tax asset. It functions as an accrual expense that reconciles the two sets of rules into one consistent financial story.
Why do deferred taxes matter for the income statement?
Deferred taxes ensure the income statement stays comparable across reporting periods by matching tax effects to the periods in which the related book income is reported, regardless of when cash taxes are actually paid.
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