Difference between temporary difference and permanent difference

Answer 1

A temporary difference is a difference between the tax bases of assets and liabilities and their carrying amounts in the financial statements, which will eventually reverse in the future. This can result in either a deferred tax liability or asset.

A permanent difference, on the other hand, is a difference between taxable income and accounting income that will not reverse in the future. This results in a permanent change in the effective tax rate.

In summary, temporary differences are timing differences that will reverse in the future, while permanent differences are permanent discrepancies between taxable income and accounting income.