What is a deferred tax liability?

A deferred tax liability arises when taxable income exceeds financial income, leading to a situation where a company owes taxes that are not yet payable. This typically results from temporary differences between the recognition of revenue and expenses for financial reporting and tax purposes. For example, a company might recognize a revenue gain on its financial statements before it is taxable under tax regulations. Therefore, the company will eventually have to pay taxes on that income in the future, creating a liability that will be realized in subsequent periods.

Understanding this concept is essential in accounting as it affects the timing of tax payments and the various financial reporting implications. Recognizing the deferred tax liability helps to ensure that the company accurately reflects both its financial position and its future tax obligations.