Deferred tax is a very important accounting measure, as it helps in matching tax effect of some transactions with the accounting impact they have. It eliminates distorted results. It gives an accurate calculation of the amount of income tax that is payable or that needs to be recovered in the future.


This is how deferred taxes are calculated:

A deferred tax is the level of depreciation, which exists between an accounting profit and taxable income. So if a machinery costs $600,000 and it depreciates for 6 years, the tax deduction will be 25%, and the depreciation will thus be calculated to $100,000 and $150,000 respectively. The temporary difference will be $50,000 for the deferred tax.


A deferred tax provides users with financial statements that has a potential impact on any future cash flows.