What is the difference between a deferred tax asset and a deferred tax liability?

• A. DTA arises from taxable temporary differences; DTL arises from deductible temporary differences.
• B. DTA arises from deductible temporary differences or carryforwards producing future tax benefits; DTL arises from taxable temporary differences causing higher future tax expenses; DTAs reduce future taxes, DTLs increase them.
• C. DTA and DTL are the same concept; both increase future taxes.
• D. DTA increases current taxes; DTL decreases current taxes.

Answer: (B)

The concept being tested is how timing differences between financial reporting and tax rules create two distinct balance sheet items: deferred tax assets and deferred tax liabilities. A deferred tax asset is recorded when deductible temporary differences or carryforwards will reduce future taxes. In other words, you expect to pay less tax in the future because of amounts already recognized or losses that can be carried forward. For example, a loss carryforward or an expense recognized in the books now but deductible for tax later produces a future tax benefit, so it’s an asset.

A deferred tax liability, on the other hand, arises from taxable temporary differences that will cause higher taxes in the future. This happens when tax rules allow earlier or larger deductions now (such as accelerated depreciation) and the accounting books recognize income sooner or differently, leading to higher taxes later. That future tax obligation is recorded as a liability.

So the best description is that DTAs come from deductible differences or carryforwards producing future tax benefits (reducing future taxes), while DTLs come from taxable differences causing higher future tax expenses (increasing future taxes).