Which of the following statements is true with respect to permanent differences in accounting?

• A. Permanent differences affect both the timing and the total amount of taxable income.
• B. Permanent differences are recorded as adjusting journal entries at the end of each period.
• C. Permanent differences are temporary and will reverse in future periods.
• D. Permanent differences arise when certain revenues or expenses are recognized for accounting purposes but never for tax purposes.

Answer: (D)

Verified step by step guidance

1. Understand the concept of permanent differences: Permanent differences occur when certain revenues or expenses are recognized for accounting purposes but are never recognized for tax purposes. These differences do not reverse over time and are not temporary.
2. Clarify the impact of permanent differences: Permanent differences affect the total amount of taxable income but do not affect its timing. They are not temporary and do not reverse in future periods.
3. Review the treatment of permanent differences in journal entries: Permanent differences are not recorded as adjusting journal entries because they are not temporary and do not require future adjustments.
4. Compare the given statements: Evaluate each statement in the problem to determine its accuracy based on the definition and characteristics of permanent differences.
5. Identify the correct statement: The correct statement is that permanent differences arise when certain revenues or expenses are recognized for accounting purposes but never for tax purposes.