Introduction to Deferred Income Taxes

Introduction to deferred income taxes for the CPA exam FAR section — this lecture answers "why do companies keep two sets of tax numbers?" and explains the difference between income tax expense (GAAP) and income taxes payable (IRS). Professor Farhat shows how temporary differences in depreciation, warranties, and revenue recognition create deferred tax assets and liabilities. Built for intermediate accounting college students and CPA candidates learning accounting for income taxes.
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Video Timeline & Key Concepts:
0:00 — Introduction
0:00 - 3:39 — The Core Problem: differences between IRS and GAAP rules (depreciation, warranties, revenue recognition) cause taxable income and financial income to diverge.
3:43 - 11:23 — Temporary Differences: a revenue-timing scenario creates a deferred tax liability, an obligation to pay tax in future years.
14:37 - 20:54 — Journal Entries: recording the differences so income tax expense reflects both the current portion (taxes payable now) and the deferred portion.
14:40 - 15:08 — Determine taxes payable using IRS rules and the tax rate.
15:10 - 15:26 — Identify deferred tax assets and liabilities for timing differences that will reverse.
15:26 - 15:59 — Plug income tax expense from current taxes payable and the deferred tax adjustment.
Frequently Asked Questions:
Why do companies calculate income taxes twice?
Companies follow GAAP to prepare financial statements for investors and follow the IRS tax code to file returns. Because the two rule sets measure income differently, a company computes financial income for the books and taxable income for the tax return.
What is the difference between income tax expense and income taxes payable?
Income tax expense is the GAAP figure reported on the income statement, while income taxes payable is the amount actually owed to the IRS. The gap between them is bridged by the deferred tax accounts.
What is a temporary difference?
A temporary difference is a gap between book and tax treatment that reverses over time, such as depreciation or warranty timing. It creates a deferred tax asset or liability rather than a permanent change to total tax.
How do you record deferred income taxes in a journal entry?
First determine taxes payable under the tax code, then identify the deferred tax asset or liability from timing differences, and finally record income tax expense as the plug that combines the current and deferred amounts.
Why does this matter for the CPA exam?
Accounting for income taxes is a heavily tested FAR topic. Understanding the terminology and the journal entry structure lets candidates handle deferred tax questions quickly and correctly under exam conditions.
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