How to Record Deferred Taxes

A deferred tax liability is created when differences in the taxable amounts of income in future years are affected by a business transaction reported in the current taxable year. Installment sales are a good example of a time when the entire cost of the item is considered income in the year sold, but the income received on the item may be received over several tax years. In those cases, the Internal Revenue Service (IRS) allows a company to defer taxes on the portion of the installment sale that is not yet received.

Instructions

1. Create a deferred tax liability account in the liabilities section of a general ledger.

2. Record the total amount of tax expense for the year as an increase to the federal tax expense account in the expense section of a general ledger. Generally Accepted Accounting Principles (GAAP) refers to an increase to an expense account as a "debit."

3. Record the total amount of tax expense that must be remitted to the IRS for the year as an increase to the Federal Tax Payable account in the liability section of the general ledger. GAAP refers to an increase to a liability account as a "credit."

4. Record the difference between the total tax expense and the amount of tax that must be remitted to the IRS for the year as an increase the Deferred Tax Liability account.

Tips & Warnings

• If you are not certain how to record a deferred tax liability, consider hiring an accountant to assist you.

References

• "Principles of Accounting"; A. Douglas Hillman, Richard F. Kochanek, Corine T. Norgaard; 1991