In the financial world, a deferred tax is one that will be paid in the future. Accountants use generally accepted accounting principles, or GAAP, in financial accounting. Deferred taxes arise because of the temporary differences between financial accounting and income tax accounting. Deferred taxes can be assets or liabilities depending on the temporary accounting difference. It is the accountant’s job to consider deferred taxes when calculating the total assets and determining the corporation’s net worth.
Assets are things that add or increase the value of a person or a corporation. Assets are listed on the balance sheet and divided into subgroups, classified as current or noncurrent depending on their estimated lifespan. Short-term assets, including cash, accounts receivable and inventory, are generally used up or sold within one year. Noncurrent assets, such as equipment and long-term investments, are expected to last longer than one year.
Net worth, which is also known as net assets, is the difference between the total assets and total liabilities of a person or a company. Corporations use the term "stockholders' equity," while sole proprietorships use the term "owner’s equity." Corporate stockholders' equity consists of contributed capital, which is money received from stock sales, and retained earnings, which is the money from profits the corporation keeps and reinvests into the business.
Calculating Total Assets
Deferred tax is an asset when the taxable income is more than the pretax corporate book income. For example, if the taxable income is $100,000 and the pretax book income is $90,000, the deferred tax asset amount is $10,000. When accountants calculate total assets, they first look at the lifespan of the deferred tax. If the deferred tax will be paid within the year, it is added to the short-term assets. Deferred taxes that will be paid more than a year later are added to the noncurrent assets. The total asset amount includes the tax-deferred amounts.
Calculating Net Worth
When taxable income is less than pretax book income, the deferred tax is classified as a liability. For example, if the taxable income is $100,000 and the pretax book income is $120,000, the deferred tax liability amount is $20,000. The deferred tax amount is included in the liabilities section of the balance sheet. Since net worth is the difference between total assets and total liabilities, deferred tax is subtracted from assets when calculating net worth.
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