While this definition may be difficult to comprehend at first reading, it was written with the intention of being more expansive than previous definitions and can be illustrated in the following examples.

As a general rule there are four basic categories of temporary differences. These include:

1. Pre-tax accounting income exceeds taxable income. Certain revenue items are considered to be earned for accounting purposes before they are included in taxable income. For example, a company may record the revenue from installment sales fully in the year of the sale for financial reporting purposes and use the installment method for income tax purposes. (On a three-year contract, the company would record all of the gross profit from the sale in the first year for accounting purposes, but record the profit over the three-year period for tax purposes.)
   
   
2. Pre-tax accounting income exceeds taxable income. Certain expense items are considered to be incurred for tax purposes before they are included in the determination of accounting income. For example, a company may use the modified accelerated cost recovery system (MACRS) for tax purposes, while using the straight-line method for book purposes.
   
   
3. Taxable income exceeds pre-tax accounting income. Certain revenue items are included in taxable income before they are considered to be earned for accounting purposes. For example, payments received in advance for services to be performed at a later time are considered to be earned for tax purposes when the payment is received, but are considered unearned for book purposes until such services are performed.
   
   
4. Taxable income exceeds pretax accounting income. Certain expense items are considered to be incurred for accounting purposes before they are included as deductions for taxable income. For example, the estimated cost of warranties may be accrued for book purposes, but not included for tax purposes until payments actually are made on the warranties.

While the categories listed above are the four general standards considered to be temporary differences, the new SFAS 109 definition actually adds another category. In this category, temporary differences can result from events that have been recognized in the financial statements and will result in taxable or deductible amounts in future years based on provisions in the tax laws that cannot be identified with a particular asset or liability for financial reporting purposes. An example of this might include organizational costs that were expensed for book purposes (written-off so that no asset exists) but deferred indefinitely for tax purposes.