Deferred tax is liable for taxes owed but not yet paid. There are certain cases where companies or taxpayers can incur tax liability but not pay taxes right away. They take this as a commitment on their accounts, so that they have a more complete picture of their finances. High deferred tax may indicate that a person or company is using unusual accounting practices and may be a cause for concern.
A common example of deferred tax is a situation where there is a difference between the way a company values things for accounting purposes in relation to tax purposes. A transaction can be recorded on the books before it is officially taxable, for example. The company notes deferred tax because otherwise there would be no way to mark down that it will owe tax on the transaction in the future.
Deferred tax accounting allows businesses to estimate how much they will have to pay in taxes so they can set aside funds to do so. In the meantime, companies are also making tax payments to keep you up to date with estimated taxes, and get a credit against their tax bill in the process. It is important to take into account how much money has been paid and will be taxed to avoid unpleasant surprises such as an unexpectedly high tax bill.
In essence, deferred tax is an amount that a company owes or will owe in taxes, and has not yet paid. It is possible for companies to make adjustments in estimated tax payments if it knows that the tax bill will be higher than previously estimated to pay the liabilities as they accrue. This is a not uncommon situation for people and companies with irregular income; A large payment for a single contract, for example, can throw off estimated tax payments.
Accountants must follow a set of standards when providing accounting services. While there are some variations within those standards, accountants working outside these standards can get into trouble. One problem that can be seen in some cases is that an auditor does not apply the standards properly or does not properly account for certain accounting expenses. This can lead to problems in tax time and during audit of finances as the questions will be asked as to why a person or company finances were not properly handled.