What are temporary and permanent differences? How are they formed in the system?

Temporary and permanent differences are concepts from accounting and tax accounting related to the recognition of income and expenses.

Temporary differences arise when the accounting valuation of income or expenses differs from the tax valuation, but this difference will be eliminated in the future. For example, depreciation for accounting and tax purposes may be calculated using different methods, leading to a temporary discrepancy.

Permanent differences are discrepancies that will not be eliminated in the future, such as expenses that are not recognized for tax purposes at all.

In the system, these differences are formed during the accounting of operations where accounting and tax rules differ. For temporary differences, deferred tax liabilities or assets are created, reflecting future tax effects.

Example: if a company immediately writes off repair expenses for accounting purposes, but these expenses are amortized for tax purposes, a temporary difference arises, which will 'balance out' in the future.