Lessons · Accounting · differences that reverse, and differences that never do
Differences that reverse, and differences that never do
A timing difference means the books and the return recognise the same amount in different periods, so it reverses later. A permanent difference is an amount one of them will never recognise at all. The distinction decides whether anything has to be carried on the balance sheet.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
It is the difference between a genuine future obligation and a number that simply is what it is. If the tax rules give relief earlier than the accounts charge the cost, the tax saved now is owed later and belongs on the balance sheet. If an expense is simply never deductible, nothing is owed later and there is nothing to carry.
How to think about it
For each difference ask one question: will this ever come back. If yes, it is timing, and something is carried. If no, it is permanent, and it only affects this year's figure.
Worked example
Relief given faster than the accounts charge the costTiming. It reverses in later years.
An expense the tax rules never allow at allPermanent. Nothing reverses.
Income taxed in a different year from when it is earnedTiming, in the other direction.
Ask: will this come backThe only question the classification needs.
Your turn
Name the kind of difference that reverses in a later period.
A difference that comes back later is a difference
Solve one, graded on the server
The trap
Treating tax saved by a timing difference as money earned. It is deferred rather than avoided, and a business that spends it as a saving meets the same amount again when the difference reverses.