Standard accounting methods and tax accounting methods have different sets of rules. If you expect to receive a payment, you may have to pay taxes on it in the current period, but not when the payment is actually received. This type of timing difference creates a deferred tax situation.
When trying to understand deferred tax assets and liabilities, it’s important to keep in mind the difference between financial reporting and tax reporting. These two forms of accounting involve different rules and calculations, and these differences can result in both deferred tax assets and deferred tax liabilities.