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Financial accounting focuses on recording and summarizing an entity's past financial activities to provide useful information to stakeholders. This involves using standardized methods to prepare financial statements such as income statements, balance sheets, and cash flow statements.
The primary goal of financial accounting is to give an accurate snapshot of a firm's historical financial performance and position, which helps investors, creditors, and other users make informed decisions. Although it is primarily historical, financial accounting does include some forward-looking estimates, like deferred tax liabilities.
Deferred tax liabilities are recorded as an acknowledgment of future tax obligations that arise from temporary differences. While these might seem unrelated to the traditional historical cost framework, they play a crucial role in providing a comprehensive view of potential future financial activities.

The historical cost framework in accounting refers to recording assets and expenses at their original purchase value. This concept ensures consistency and comparability of financial statements over time.
While historical cost is a cornerstone of financial accounting, it can present limitations, particularly when future obligations, like deferred taxes, need to be considered. Deferred tax liabilities highlight potential taxes based on current transactions that will only be paid if certain conditions, such as future earnings, are met.
This integration of future estimates within the historically-based framework allows businesses to match revenues and expenses accurately. For example, if a firm sells goods on installment, revenue is recognized immediately for financial accounting purposes. However, for tax purposes, it might be recognized as payments are received, creating a temporary difference that generates deferred tax liabilities.

Income recognition concerns determining when and how much income should be reported in the financial statements. This process ensures that income is recognized at the right time, contributing to the reliability and accuracy of financial reports.
The primary principle behind income recognition is that income should be recognized when it is earned, regardless of when cash is received. This can result in timing differences between financial accounting and tax accounting, giving rise to deferred tax liabilities.
For instance, a company might recognize revenue from a sale once goods are delivered, while for tax purposes, it might recognize revenue only when payment is received. This timing difference means that while the company's accounting records show income before taxes are paid, taxes will be due on this income in future periods, creating a deferred tax liability.
Accurately recognizing income and understanding the resulting tax implications ensures that a firm's financial position is not overstated or understated, providing clear insights to stakeholders.