What does deferred tax represent in accounting?

Deferred tax represents a tax obligation that has been incurred but has not yet been settled in cash. It arises due to temporary differences between the accounting treatment of income and expenses and their treatment for tax purposes. When a company recognizes revenue or expenses differently for accounting and tax reporting, it shows a mismatch that leads to a deferred tax situation.

For instance, if a company recognizes an expense for accounting purposes but can only deduct that expense for tax purposes in a later period, this creates a deferred tax liability. Essentially, the company has a future tax payment obligation that is recognized now, based on current accounting practices.

Other options do not accurately capture the essence of deferred tax. Overpayment of taxes does not create a deferred obligation; rather, it may result in tax credits or recovery in future periods. A tax that will never be collected does not align with the concept of deferred tax, as deferred tax liabilities will have to be settled in the future when timing differences reverse. Finally, deferred taxes can apply to both corporate entities and other types of organizations, thus making the notion it applies only to corporations inaccurate.