A deferred tax asset represents what?

A deferred tax asset represents what?

• A. A financial benefit
• B. A future tax obligation
• C. A current tax payable
• D. A tax penalty

Answer: (A)

A deferred tax asset represents the financial benefit of future tax savings that arise from deductible timing differences, losses carryforwards, or tax credits. Because these items will reduce taxes payable in future periods, they are recorded as an asset on the balance sheet. It’s not a future tax obligation (that would be a deferred tax liability), not a current tax payable (that’s taxes due for the current period), and not a tax penalty.

A deferred tax asset represents the financial benefit of future tax savings that arise from deductible timing differences, losses carryforwards, or tax credits. Because these items will reduce taxes payable in future periods, they are recorded as an asset on the balance sheet. It’s not a future tax obligation (that would be a deferred tax liability), not a current tax payable (that’s taxes due for the current period), and not a tax penalty.