A deferred tax liability is an account on a company’s balance sheet that is a result of temporary differences between the company’s accounting and tax carrying values, the anticipated and enacted income tax rate, and estimated taxes payable for the current year.

Deferred tax assets can arise due to net loss carry-overs, which are only recorded as asset if it is deemed more likely than not that the asset will be used in future fiscal periods.

Let’s understand it and its treatment in the real world ,

1. Case I 

Condition : Book Profit > IT Profit

Result : Deferred Tax Liability

Explanation : Because if tax was calculated on Book Profit the Tax would be more. Tax calculated on IT profit is less than the Book Profit. Hence a Liability of Tax Savings is made in the current year but it will result in Future Tax Liability

as a result of Depreciation and other item.

2. Case II 

Condition : IT Profit > Book Profit

Result : Deferred Tax Asset

Explanation : Because if Tax was calculated on Book Profit the Tax would be more. Tax Calculated on IT profit is more than the Book Profit. Hence more Tax is made in the

current year, which will result in More Tax Paid on Profit.

3. Case III

Condition : Book Loss > IT Loss

Result : Deferred Tax Assets

Explanation : Tax Saving will be lower in earlier years as per Tax laws, However it will be more as per accounting treatment. Therefore a deferred Tax Asset will be created for

such timing diff which will be realized in the Future period when tax savings as per tax laws will be more. Similarly another timing diff will be created in respect of Tax Loss which can be carried forward to future period for being set off

4. Case IV 

Condition : IT Loss > Book Loss

Result : Deferred Tax Liability

Explanation : Tax Saving will be more in earlier years as per Tax laws, However it will be less as per accounting treatment. Therefore a deferred Tax liability will be created for

such timing diff which will be realized in the Future period when tax savings as per tax laws will be less. Similarly another Timing Diff will be created in respect of Tax Loss which

can be carried forward to future period for being set off.