Final answer:
Deductible and taxable temporary differences are differentiated by how they are treated in financial statements, with deductible temporary differences leading to future tax deductions and taxable temporary differences leading to future taxable amounts.
Step-by-step explanation:
We differentiate between deductible and taxable temporary differences primarily by their treatment in financial statements. Deductible temporary differences will eventually lead to deductible amounts in the computation of taxable income in future periods when the related asset is recovered or liability is settled. Taxable temporary differences will result in taxable amounts in future periods when the related asset is recovered or the liability is settled.
For example, when a company recognizes revenue for accounting purposes before it is included in taxable income, this creates a taxable temporary difference, resulting in deferred tax liabilities. Conversely, if a company incurs expenses that are not currently deductible for tax purposes, this creates a deductible temporary difference, leading to deferred tax assets.