Deferred Tax Asset Explained.

Deferred tax asset explained for the CPA exam FAR section — this lecture answers "what is a deferred tax asset and how do you record it?" and walks through the journal entries step by step. Professor Farhat breaks down how a deferred tax asset arises from temporary differences between GAAP book income and IRS taxable income, using a clear estimated-warranty example. Ideal for intermediate accounting college students and CPA candidates studying accounting for income taxes.
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Video Timeline & Key Concepts:
0:00 — Introduction
0:00 - 2:40 — What is a Deferred Tax Asset? A future tax benefit created by a temporary difference when an expense is recognized for GAAP now but deductible for tax later.
2:40 - 4:20 — Warranty Example: estimated warranty liability shows why books record the expense immediately while the IRS allows the deduction only when cash is spent on repairs.
5:40 - 8:50 — Calculations and Journal Entries: computing taxable income by adding back the temporary warranty difference, then the entry debiting Deferred Tax Asset, crediting Income Taxes Payable, with Income Tax Expense as the plug.
9:05 - 10:20 — Reversal in Future Years: as warranty work is performed, the deferred tax asset is credited (reduced) and tax expense adjusts accordingly.
Frequently Asked Questions:
What is a deferred tax asset?
A deferred tax asset is an amount that represents future tax savings. It arises when a company pays more tax now (or deducts an expense later for tax than for books), so the difference reverses and reduces taxes owed in a future period.
How is a deferred tax asset different from a deferred tax liability?
A deferred tax asset reflects taxes you will save in the future, while a deferred tax liability reflects taxes you will owe in the future. The asset comes from expenses recognized on the books before they are deductible for tax; the liability comes from income taxed later than it is booked.
What journal entry records a deferred tax asset?
You debit Deferred Tax Asset for the future benefit, credit Income Taxes Payable for the current tax due, and record Income Tax Expense as the balancing plug figure that combines the current and deferred portions.
Why does the warranty expense create a deferred tax asset?
Warranty expense is estimated and recorded for financial reporting when the sale occurs, but the IRS only allows the deduction when the repair cash is actually spent. That timing gap is a temporary difference that generates a deferred tax asset.
Is a deferred tax asset a permanent or temporary difference?
It is a temporary difference. Deferred tax assets and liabilities only arise from timing differences that eventually reverse, never from permanent differences that never turn around.
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