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Provisions and estimates on accounts items just increase workload and suspense account balances. This are some of items that affect the true and fair statement of company financial affair. Infact this items sometime are used to hide some real liquidity problems of the company and henceforth mislead investors to make wrong risk investment decission.
Divyesha you are right if we view from tax point and deferred tax cause temporary difference while disallowed financial statement items cause timing difference but there are other provisions that cause unnecessary difference in book accounts flactuating with time by increasing or decreasing based on projected assumptions- This basis of account preparation fails to reflect the true real state of affair of the respective company and usually mislead investors when making investment decission. I believe most world past major corporate financial fraud/scam may have been caused by this basis of financial procedure. Provisions like Royalties, hire purchase, development and research, Bad debt provision, Depreciation method rates, foreign exchange loss and income, good will impairment and amortisation, disposal / purchase of subsidiary, joint venture and associate, revaluation of property, plant & equipment, inflation and interest rate and many others!!
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Temporary differences occur because financial accounting and tax accounting rules are somewhat inconsistent when determining when to record some items of revenue and expense. Because of these inconsistencies, a company may have revenue and expense transactions in book income for2014 but in taxable income for2013, or vice versa.
Two types of temporary differences exist:
One results in a future taxable amount, such as revenue earned for financial accounting purposes but deferred for tax accounting purposes. This may happen if a company uses the cash method for tax preparation.
The second type of temporary difference is a future deductible amount. The company is reporting an expense on the current tax return but reports it for financial statement purposes in the future.
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