Introduction
Accounting is divided into several branches that have evolved to meet specific needs. For instance, there is Tax Accounting , which deals specifically with tax laws and the management of tax liabilities. Other branches include Cost Accounting, whose focus is on the ascertainment and regulation of production costs to maximize efficiency and profitability. Understanding all these differences is thus important for regulatory compliance and effective business management.
Tax Accounting
Tax accounting is the practice of accounting that deals with taxes rather than the form of public financial statements. Alternatively, tax accounting can be defined as the art of accounting for taxation.
The Internal Revenue Code outlines the exact rules that companies and other entities must follow in preparing their tax returns. Tax accounting applies to everyone : individuals , business entities, corporations, and the like. Even those exempt from paying taxes must engage in some form of tax accounting. It helps keep track of funds- both incoming and outgoing-related to individuals and entities.
Types of Tax Accounting
Tax Accounting for Individuals
For an individual taxpayer , tax accounting concerns items such as income, qualifying deductions, and gains or losses from investments. In this way, the information required to manage an annual tax return for an individual is limited, and although a tax accountant can be helpful , it is not a legal requirement.
Tax Accounting for Businesses
In business, even more information must be collected during the tax accounting process. In addition to tracking the company’s earnings or incoming funds similarly to individuals , there is an added layer of complexity involving any money directed out of the business toward various obligations.
This can include funds directed toward specific business expenses and shareholders.
It is not necessary to hire a tax accountant for this purpose ; however , it is quite common in larger organizations since the records can be complex .
Tax Accounting for Tax-Exempt Organizations
Even for the most tax-exempt organizations, there remains a role for tax accounting. Most organizations have annual returns that they must file , indicating all funds coming into the organization, whether from grants or donations , and, more importantly, how the funds are utilized in the organization’s operations. This process ensures that the organization is operating within the requirements and regulations applicable to a tax-exempt entity.
Cost Accounting
Cost accounting is one area of managerial accounting that aims to calculate the overall cost a firm incurs to generate its products. To achieve this , the given accounting method calculates all the variable and fixed costs incurred by a company.
Cost accounting is not aligned with GAAP, and this accounting method is utilized only by companies to calculate their activities within the organization itself.
Types of Cost Accounting
Standard Costing
Standard costing comprises the “standard” costs, which are neither actual nor required costs, including the cost of goods sold (COGS) and inventory. This standard is based on best practices regarding labor usage and material requirements to complete the goods or services under normal working conditions. These standard costs are also essentially budgeted figures. Even though standard costs are assigned to the goods, the business still incurs actual costs.
Activity-Based Costing
Activity-based costing traces the overhead costs from each department and allocates them to specific cost objects, such as goods or services. The basic principle of ABC cost accounting is activities. Activities are defined as any type of event, unit of work, or task with a definite objective-such as setting up machines for production, designing products, distributing finished goods, or operating machines. They are also cost drivers and constitute measures for overhead cost allocations.
Lean Accounting
The goal of lean accounting is to improve the methods through which an organization manages its finances. Lean accounting traces its roots back to the concepts of lean manufacturing and production , which aim to avoid waste while maximizing productivity. For example, if an accounting department can reduce time wastage, employees can utilize the saved time more constructively on value-added activities.
Marginal Costing
Marginal costing, also known as cost-volume-profit analysis, examines the cost of a product in terms of what happens if one more unit is added to the production process. It is particularly useful for short-term economic decisions and can help management determine the outcome of changing cost and volume combinations on operating profits. Management can use this type of analysis to identify new products that might be profitable, sales prices for existing products, and the effects of marketing campaigns.
Difference Between Tax Accounting and Cost Accounting
Conclusion
Tax Accounting tends to consider matters that relate to compliance with taxation and the minimization of liabilities. Cost Accounting is a matter that deals with cost management towards optimizing profitability. Both approaches to financial management complement each other as they support compliance and strategic business decision-making.