Hi
Could someone please tell me if I'm correct on this?
I have a client with depreciated assets @ 25%, as Writing down allowance is only 20% will this create a deferred tax asset?
Also, how do you show deferred tax in a journal, presumably I have to show depn too? After the asset is completely depreciated is the remaining amount in deferred tax allowed as a WDA?
Thank you
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Professional advice needed
I think you should speak to an accountant to get proper tax advice, as your question is very confused.
You (presumably) have a fixed asset, with a 25% depreciation rate so the accounting entries are Cr Accumulated depreciation, Dr Depreciation charge P&L, each time you depreciate the asset.
In the tax computation you will disallow any depreciation in the accounts, and claim capital allowances instead.
Deferred tax is an accounting concept only (nothing to do with the tax return). If you have a timing difference between the Net Book Value (NBV) of the asset and the Tax Written Down Value (TWDV) at the end of the year, then you have deferred tax. So given that you should have a lower NBV than TWDV, you do indeed have a deferred tax asset which has to be calculated at the relevant tax rate. The accounting entry is Dr Deferred tax asset, Cr Tax expense P&L. The deferred tax will eventually reverse in later years since the TWDV and WDV will eventually both be zero. However, all deferred tax entries will always be between the Deferred tax asset/liability & the Tax expense account.