Someone Please Explain me Logic of DTA/DTL

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SAARIKA (Querist)

21 September 2010 Please someone explain me this DTA/DTL adjustment through journal entries , & whats the logic behind this

Thrissurkkaran Ishtan

Thrissurkkaran Ishtan (Expert)

23 September 2010 Can you elaborate DTA?
You mean Double Taxation Agreement?

shakuntala chhangani

shakuntala chhangani (Expert)

26 September 2010 Hi Sarika, as u know accrual concept is our fundamental accounting assumption. It means that all exp and income should be accounted for in the year in which the same accrues. before the introduction of AS 22, we used to provide for tax as per the liability to pay and not as per accrued liability as per accounts. now, that thing has been removed with the introduction of AS 22. Any item due to which there is deferment of tax liability (timing differences) should not affect the current period. this is done by creating DTA / DTL.
Regards, CA Shakuntala Chhangani

Thrissurkkaran Ishtan

Thrissurkkaran Ishtan (Expert)

27 September 2010 Further to the other expert's comment, let me explain through an example.

Assume that your profit as per P&L is 10,000 but taxable profit is 8,000 (due to tax depreciation is higher than accounting depreciation). Further assume that tax rate is 30%. In this case your actual tax is 8000 X 30% = 2400.
As per DTA/DTL, you will provide a tax of 10,000 X 30% = 3,000 by debiting 600 to DTL.. Your entry will be:

Tax cost (P&L) Debit 3000
Tax Liability Credit 2400
DTL Credit 600

It is assumed that the tax saving is only temporary (important) and soon your tax depreciation will be more than accounting depreciation.

If taxable profit is higher, then you will create a DTA (reverse).

Hope this is clear.

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