Final answer:
Temporary differences between book and taxable income create deferred tax assets or liabilities and will reverse over time, such as faster tax depreciation. Permanent differences, like non-deductible expenses, affect tax expenses without creating deferred items and will not reverse.
Step-by-step explanation:
In accounting, temporary differences occur when there is a discrepancy between the tax base of an asset or liability and its carrying amount on the balance sheet, which will result in taxable or deductible amounts in future years. An example of a temporary difference is when a company depreciates an asset more quickly for tax purposes than for accounting purposes. This leads to lower taxable income in earlier years and higher taxable income in later years until the difference reverses.
In contrast, permanent differences are discrepancies between the book income and taxable income that will not reverse over time. An example of a permanent difference is expenses that are not deductible for tax purposes, such as fines or penalties.
The accounting treatment for these differences varies: temporary differences will give rise to deferred tax assets or liabilities on the balance sheet, while permanent differences will affect the tax expense reported in the income statement without creating any deferred tax assets or liabilities.