Firms often use different methods of accounting for tax and financial reporting purposes, leading to a question of how tax liabilities should be reported. Since the use of accelerated depreciation and favorable inventory valuation methods for tax accounting purposes leads to a deferral of taxes, the taxes on the income reported in the financial statements will generally be much greater than the actual tax paid. The same principles of matching expenses to income that underlie accrual accounting suggest that the 'deferred income tax' be recognized in the financial statements. Thus a company which pays $55,000 on its taxable income based upon its tax accounting, and which would have paid $75,000 on the income reported in its financial statements, will be forced to recognize the difference ($20,000) as deferred taxes. Since the deferred taxes will be paid in later years, they will be recognized as paid.
It is worth noting that companies that actually pay more in taxes than the taxes that they report in the financial statements created an asset which is called a deferred tax asset. This reflects the fact that the firm's earnings in future periods will be greater as the firm is given credit for the deferred taxes.
The question of whether the deferred tax liability is really a liability is an interesting one. Firms do not owe the amount categorized as deferred taxes to any entity, and treating it as a liability makes the firm look more risky than it really is.