deferred taxation

[imran Hasnain]

dear friends,

please tell me about deferred taxation and the procedure of dealing deferred taxation in accounting

regards,

imran

[sportyspice]

deffered taxation is a concept in which govt gives an incentive to industry by allowing them to buy machinery and instead of depreciating them equally over their useful life enabling them to apply a low depreciation rate in the initial years and more in the later. for e.g. a machinery having a life of 5 yrs can be depreciated 50 percent in yr1 20 in yr 2 20 in yr 3 and 5,5 each in the remiang years. this arrangement is done to save tax in the tax books of the company where deppreciation since is a non cash expense and id deducted form income leaving less income to be taxed therefore saving tax to the comapany in the initial years which however will be paid in later years but atleast cashflows will be more in the initial years of buying the machinery thus helping the firm. tax is deffered in a way that is why it is called deffered taxation.

the acounting treament is the same as regular depp i.e equally deducted from income over the five years period. it effects only the tax books which are not public. govt do this to encourage firms to invest in machinery therefore creating employment. depp rates that apply are diff and diff firms follow diff rates but the basic purpose reamins the same.
i hope u got the vivid picture as if you dont have any background in finance than it will be difficult to expalin the whole concept on the forum.