Tax on income is one of the significant items in the statement of profit and loss of an enterprise. In accordance with the matching concept, taxes on income are accrued in the same period as the revenue
and expenses to which they relate. Matching of such taxes against revenue for a period poses special problems arising from the fact that in a number of cases that in a number of cases; taxable income may be significantly different from the accounting income. This divergence between taxable income and accounting income arises due to two reasons:
Firstly, there are differences between items of revenue and expenses as appearing in the statement of profit and loss and the items, which are considered as revenue, expenses or deductions for tax purposes i.e. permanent difference. Such permanent differences are the difference between taxable income and accounting income for a period that originate in one period and do not reverse subsequently.
Secondly, there are differences between the amount in respect of a particular item of revenue or expenses as recognized in the statement of profit and loss and the corresponding amount which is recognized for the computation of taxable income. i.e. timing difference. Such timing difference are those difference between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.