In order to record a deferred tax asset, a balance sheet asset account named “Deferred Tax Asset” must be created and credited with the tax benefit. Tax expense realized in the current period is decreased by the matching entry made to the income tax expense account on the income statement. When the deferred tax asset is realized, it is subsequently recorded as a reduction in future income taxes due.
Net operating losses, often known as corporate NOLs, are tax losses that develop when a company’s tax deductions are greater than its taxable income. These losses may be carried either forward or backward to reduce taxable income in either the future or the past. Although corporate NOLs are perpetual, they may be constrained by the amount of taxable income a corporation expects to produce in the future.
When a business has a corporate NOL, it can use it to offset future years’ taxable revenue and lower its tax obligation. The deferred tax asset related to the NOL, which is estimated based on the future tax benefit that will be realized when the NOL is used to lower taxable income, must first be recognized by the company. The deferred tax asset account is credited and the income tax expense account is debited in the journal entry for the deferred tax asset associated with NOL.
To sum up, corporate NOLs and deferred tax assets are crucial accounting ideas that can have a big impact on a company’s financial statements and tax liabilities. For correct financial reporting and tax planning, it is crucial to comprehend the corporate NOL treatment and the journal entry for deferred tax asset. Companies can lower their tax liability and boost their bottom line by recognizing the deferred tax asset linked to NOLs and other transitory differences.