Deferred taxes: - what are they and why are they needed?

Sometimes it is observed that tax payers tend to delay paying their taxes. The a rgument goes that due to the concept of Time value of money (the present value o f a certain amount "a" of money is greater than the present value of the right t o receive the same amount of money at a time in the future), certain tax payers prefer to pay less tax now. This way they can invest more money now for future g ains. The tax payers are in the process just delaying the tax paying process to a future date. Ofcourse, the amount of tax paid in a period still remains the sa me. In such cases, we observe that there are temporary differences resulting between the book value of the assets/liabilities and their tax value. The accounting te rm used to describe the future tax liability or asset resulting from such tempor ary differences between the book value and the tax value of assets/liabilities a re known as deferred taxes. Deffered tax liabilities: In some tax systems, companies may be able to "carry forward" losses to future y ears, which may be referred to as tax write-offs. In such cases, the company may have a tax asset representing the amount that future taxes payable may be reduc ed due to tax losses in previous years. Expenses which are accounted for on an accrual basis (that is, when they become due and not when they are actually paid) may not be applicable to tax accounting and therefore to taxable profit. Companies may charge off duty, cess and tax du es against profits when they become due, but they would be recognised for tax co mputation only when actually paid. In such cases, a company is actually pre-paying taxes pertaining to future years . For the year, the profits that are taxable would be higher than those computed in the company's books of accounts; there is a timing difference in the recogni tion of the taxable profit compared to the accounting profit. So, while the company shells out a disproportionately high tax in the current ye ar, it would save on tax in the years when the expenses or provisions actually m aterialise. Deffered tax assets: Deferred tax assets are the deferred tax consequences attributable to deductible temporary differences and carryforwards. Valuation allowance: - what is it and what's the need for a valuation allowance? having given a background on deferred taxes,Lemme explain what a "valuation allo wance" is: As per the web definition, "Funds in an account established to cover probable lo an losses constitute a valuation allowance. If a savings association believes a loan is uncollectible, it sets aside in the reserve account a portion of earning s equal to the difference between unpaid principal and the market value of the l oan. If the loan is charged off as worthless, the institution writes down the lo an portfolio and the reserve account by equal amounts." Going a li'l deep, incase there is felt that a deferred tax asset will not be re alized in the future, companies generally adhere to a standard practise of setti ng aside some money refered to as a valuation allowance. In stict accounting sen se, valuation allowance is nothing but another special contra account