ACFE Accounting Terms Practice Test

Deferred taxes come from timing differences between how assets and liabilities are reported for accounting purposes and for tax purposes. These differences don’t disappear when the numbers are first recorded—they will reverse in future periods, creating a tax effect then. If the future effect of a timing difference is to reduce future taxes (for example, deductible temporary differences or loss carryforwards that will lower taxable income later), a deferred tax asset is created. If the future effect is to increase future taxes (taxable temporary differences that will raise taxable income later), a deferred tax liability is created. That idea is captured by saying a temporary difference can lead to either a DTA or a DTL, depending on whether the expected future tax outcome is deductible (reducing future taxes) or taxable (increasing future taxes). Why the other statements don’t fit: a DTA doesn’t arise simply because taxable income exceeds accounting income; it arises from deductible differences or loss carryforwards. A DTL is not from deductible amounts but from taxable differences that will cause higher taxes in the future. Deferred taxes are not recognized only when tax is paid; they’re recognized to reflect future tax consequences of current timing differences.