Temporary differences, unlike permanent differences, alter taxable income and pre-tax financial statement income at different times. Temporary differences are items that either affect pre-tax financial statement income in the current period and then affect the taxable income in the future period, or they affect the taxable income in the current year and then affect the pre-tax financial statement income.
Some examples of items that affect the calculation of pre-tax financial statement income and taxable income is the method of recognizing revenue such as the installment sales method, prepaid rents and depreciation.
Example:
Adequate Disclosure uses the installment sales method to recognize revenue on its financial statements; however it uses the cost recovery system for its tax return.
Tax Return Income per Financial Statements
Taxable Income: $500,000 $750,000
What is the amount of temporary difference that will be deferred for the future years? $250,000