What is a Temporary Difference?

A temporary difference is the difference between the carrying amount of an asset or liability in the balance sheet and its tax base. A temporary difference can be either of the following:

Deductible. A deductible temporary difference is a temporary difference that will yield amounts that can be deducted in the future when determining taxable profit or loss.
Taxable. A taxable temporary difference is a temporary difference that will yield taxable amounts in the future when determining taxable profit or loss.

In both cases, the differences are settled when the carrying amount of the asset or liability is recovered or settled.

Because of temporary differences, the expense that an entity incurs in a reporting period usually comprises both current tax expense or income, and deferred tax expense or income.

Examples of Temporary Differences

Several examples of temporary differences are as follows:

A product warranty liability is recognized at once in a company’s financial statements, and may result in a tax deductible amount at a later date, when the related liability is settled.
A receivable from an installment sale is recognized in a company’s current-period financial statements, and may result in taxable revenue at a later date, when the related payment is received.
Depreciable personal property is deducted immediately for tax purposes, while it is depreciated in a company’s financial statements over an extended period of time.
Subscriptions received in advance are recognized at once for tax purposes, while they are recognized as a liability in the company’s financial statements.