Which statement best describes temporary differences under accrual accounting for tax vs book?

• A. Temporary differences create no impact on taxes and are ignored.
• B. Temporary differences create deferred tax assets or liabilities and arise from timing differences.
• C. Permanent differences create deferred tax assets or liabilities.
• D. Taxable income always equals book income.

Answer: (B)

Temporary differences arise when the amount of income or expense recognized for financial reporting (book) purposes is different from what is recognized for tax purposes, and these differences will reverse in a future period. Because they will reverse, they create future tax effects that show up as either a deferred tax asset or a deferred tax liability, depending on whether the reversal will reduce or increase future taxes. This is why the concept is about timing differences between accrual-based accounting and tax rules, not about permanent gaps that never reverse.

In contrast, permanent differences never reverse and thus do not create deferred taxes, and taxable income does not always equal book income due to these differences.