This difference is dealt with by the use a deferred tax item on the balance sheet. The arising difference between the tax expense and taxes paid will reverse in the future, since the expense will be shown in both the income statement and tax account eventually, but not in the same time period. This reduces the uncertainty regarding the amount of the expense. If an estimate expense is included in the income statement, correctly under accounting rules, the tax authorities may be more likely to only allow a deduction for the expense in calculating taxable profits when the cash payment is actually made. Tax accounting, on the other hand, generally includes items on a cash basis. This means that expenses are matched to the accounting period where associated income is earned, as opposed to when cash is paid or received. The income statement is driven by the matching principle of accrual accounting. These are different from permanent differences where the tax accounting treatment in fundamentally different to its treated in the financial statements. Temporary differences arise when the treatment of an income statement line item is the same for both tax and accounting purposes, but the timing of this treatment is different.
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