Final answer:
Cumulatively unfavorable temporary differences are referred to as deductible temporary differences in tax accounting because they result in future tax deductions. For example, if a company recognizes revenue earlier for tax purposes than for financial reporting purposes, it creates an unfavorable temporary difference that can be deducted in the future to lower the tax liability.
Step-by-step explanation:
In the context of tax accounting, cumulatively unfavorable temporary differences are referred to as deductible temporary differences because they result in future tax deductions. Temporary differences arise when there is a difference between the income or expense recognized for financial reporting purposes and the income or expense recognized for tax purposes. These temporary differences can be either favorable or unfavorable, and deductible temporary differences fall into the unfavorable category.
For example, let's say a company receives an advance payment of $10,000 for services that will be provided in the next financial year. For financial reporting purposes, the company recognizes the payment as a liability until the services are provided. However, for tax purposes, the company recognizes the payment as revenue in the current year when the advance payment is received. This difference in timing creates a temporary difference. In this case, the temporary difference is unfavorable because it will result in a higher taxable income in the current year compared to the income recognized for financial reporting purposes. As a result, the company can deduct this unfavorable temporary difference in the future, lowering its taxable income and reducing its tax liability.
In summary, cumulatively unfavorable temporary differences are referred to as deductible temporary differences in tax accounting because they result in future tax deductions, allowing companies to lower their tax liability.