Final answer:
The correct answer is a Deferred tax liability, which occurs when taxable income is less than the income reported due to differences in accounting and tax regulations, requiring taxes to be paid in a future period.
Step-by-step explanation:
When tax laws allow a company to postpone paying taxes on earnings that are currently reported in the company's income statement, the company recognizes a Deferred tax liability. This concept exists because of differences between accounting practices and tax regulations. Financial accounting and tax accounting do not always align in the timing of income recognition; thus, creating periods where earnings may be recognized by accounting standards but taxed in a different period under tax laws.
A Deferred tax liability is recorded on a company's balance sheet when the company has incurred a tax expense that is reported in the current income statement but will be paid in a future tax period. This situation arises because the company's taxable income, according to tax laws, is temporarily less than the income before tax reported on the income statement due to differing treatments of revenue and expense recognition.
It is not to be confused with a Deferred tax asset, which would be recognized if the company had paid more taxes in advance than the income tax expense recognized in its financial statements. A valuation allowance might be used in conjunction with deferred tax assets, to reduce their carrying amount if it is more likely than not that the asset will not be fully realized.