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Temporary difference and permanent difference

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Why is it important to understand the difference between an originating temporary difference and permanent difference in a company? Explain if this concept is relevant for personal finance.

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First the definitions:

A temporary difference is a timing issue meaning that a difference between financial income and taxable income is temporarily not the same. That difference will reverse itself in time.

A permanent difference will never turn around because an event that is include-able or deductible for financial income will never be a taxable event.

Deferred income taxes are calculated to show the reduction or increase in future taxes when a temporary difference reverses itself.

Why is it important to understand the difference ...

Solution Summary

The 344 word, cited solution first defines the two differences and then provides three business examples and one personal example of the importance of timing differences.

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Difference between an originating temporary difference and permanent difference

Why is it important to understand the difference between an originating temporary difference and permanent difference in a company? Explain if this concept is relevant for personal finance.

See Chapter 19 of Intermediate Accounting.

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