Tax accounting and Financial Accounting are two similar terms as mentioned below:
Accounting plays a crucial role as it works as support structure for the financial processes in an organization. The two related but unique subfields of accounting are tax accounting and financial accounting.
Whereas, financial accounting is more about creating reports for outside users, tax accounting guarantees the company’s compliance with tax legislation.
In this article those two closely related and yet so distinct fields of tax and financial accounting are explored from the view of the overview, calculations, purposes, types, differences, and examples.
This chapter will introduce the topics of tax accounting and financial accounting.
Tax Accounting
In simple words, Tax accounting relates to preparation and processing of tax that are to be paid to the government or tax return to be filled by the organization/company.
It revolves around the compliance with the laws of taxation as provided by the bodies like the Internal Revenue Service (IRS) of the United States of America or the Income Tax department in India for example.
The primary objectives of tax accounting involve the determination of the taxable income and compliance with various tax requirements. Tax accountants also plan how tax can be kept as low as possible legally.
Financial Accounting
Financial accounting involves analyzing, processing, summarizing and presenting the financial activities of an organization within a particular period.
The main report is financial and contains such documents as the income statement, balance sheet and cash flow statement that show financial position and performance of an entity interest groups of stakeholders including investors, creditors and regulators.
Business accounting is conventionally regulated by standard measures like GAAP or IFRS.
Differences in Tax Accounting and Financial Accounting
Tax Accounting Calculations
Key calculations in tax accounting include:
Taxable Income: Calculated after eliminating all those deductions that are permitted by the law from the gross income earned.
- Formula: Taxable Income = Total income – allowable expenses – allowed deductions.
Tax Liability: Calculated relative to the taxable income applying the appropriate tax charges.
- Formula: Things worth noting include the following; Tax Liability = Taxable Income × Tax Rate
Deferred Taxes: Accompany timing differences between the accounting income and the taxable income of an enterprise.
- Formula: Deferred Tax Asset/Liability = × Tax Rate Temporary Difference
The following are among the financial accounting calculations
Key calculations in financial accounting include:
Net Income: Shows the income generating ability of a business.
- Formula: Net Income = Total Gross Profit – Whole expense polyester.
Assets and Liabilities: Appears in the balance sheet.
- Formula: Assets = Liabilities + Equity
Cash Flow: Keeps record on cash receipts and on cash payments made.
- Formula: Calculation of Net Cash Flow = Cash Inflows from a range of activities less the Cash Outflows of similar activities
Employment in Tax Accounting and Accounting-financial
Tax Accounting Work
Tax accountants perform various tasks, including:
- Preparation of Tax Returns: Pay as you earn, Value Added Tax, and other tax returns compliance, that include income tax returns, sales tax returns and property tax returns.
- Tax Planning: The information is applicable to situations where clients need to be counsel for proper planning to avoid paying high taxes or increase deductions, credits, and deferral.
- Compliance: Check compliance to tax laws and or regulations of the country.
- Audit Support: Helping where the company is being audited by the tax authorities from one of the territories.
Financial Accounting Work
Financial accountants undertake the following activities:
- Bookkeeping: Recording of Current expenses and Receipts on daily basis.
- Financial Reporting: Making financial statements at least once each year.
- Budgeting and Forecasting: Drafting of financial proposals.
- Regulatory Filings: Reporting in accordance with reporting standards laid down by the relevant authorities.
An analysis of the Principles of Tax Accounting with a comparison to the Principles of Financial Accounting.
Principles of Tax Accounting
- Legality: Tax accounting falls under the therefore legal requirements governing the practice must be in adherence to tax laws and regulations.
- Materiality: Large changes in taxable income resulting from important transactions must be disclosed.
- Consistency: There is information that consistent methods should be used for computation of taxable income.
- Conservatism: The problem with overstating tax liabilities or understating tax benefits should be avoided as much as possible.
Principles of Financial Accounting
- Relevance: It must provide knowledge that is relevant towards a specific decision making.
- Reliability: Information must be correct and uncontaminated by the personal point of view of the writer.
- Comparability: Comparisons should be made possible by preparing the financial statements consistently.
- Transparency: Some disclosure requirements are aimed at providing the highest possible degree of clarity and completeness of financial information.
Target of Taxing and Bookkeeping
Purpose of Tax Accounting
The primary purpose of tax accounting is to:
- Report and contemplate with tax requirements and compliance.
- Determine and meet the correct tax incidences.
- Pay as little tax as possible but do this as legally as possible.
- Offer services in tax support for planning and audit services.
Purpose of Financial Accounting
The main objectives of financial accounting include:
- The issue is simply giving stakeholders financial information.
- It helps in making aware the investors and the creditors in making their decisions.
Specifically, in spite of the current trend of deception and fixing of figures, the goal of the accounting information system aims to provide:
- Compliance with regulatory and statutory recognition.
- Different categories of tax accounting and financial accounting
Types of Tax Accounting
- Individual Tax Accounting: Is mostly about filing personal tax returns based on the income, various expenditures and credits.
- Corporate Tax Accounting: Business taxes; income tax, sales tax and excise duties.
- International Tax Accounting: Relates to tax considerations in cross border transactions.
- Estate Tax Accounting: HQ tax matters include those connected to inheritances as well as estates.
Types of Financial Accounting
- Cash Accounting: It records only transactions in cash and cash equivalents.
- Accrual Accounting: Makes entries in the books of account at the time of accruals irrespective of actual cash received and paid.
- Managerial Accounting: Covers internal reporting for decision-making purposes of the management only.
- Cost Accounting: Studies cost in a bid to optimize expense for enhanced operational performance and revenues.
Difference between Tax Accounting and Financial Accounting
| Aspect | Tax Accounting | Financial Accounting |
| Objective | Compliance with tax laws and regulations | Providing financial information to stakeholders |
| Governance | Tax codes and regulations (e.g., IRS, IT Act) | GAAP, IFRS |
| Focus | Taxable income | Financial performance and position |
| Users | Tax authorities, auditors | Investors, creditors, regulators |
| Methodology | Adjustments for tax purposes | Adherence to accounting standards |
| Timing Differences | Recognizes income and expenses per tax laws | Matches income and expenses to the accounting period |
| Flexibility | Limited to tax rules | Allows professional judgment |
This paper aims at comparing and providing examples of Tax Accounting and Financial Accounting.
Examples of Tax Accounting
- Depreciation: It is very common to experience let’s say tax legislation to permit accelerated depreciation for the purpose of minimizing taxable income.
- Example: Modified Accelerated Cost Recovery System (MACRS) – a method of a company for tax purposes.
- Tax Deductions: Taxpayers seeking to reduce the tax they pay through depressing allowances for charitable contributions, or employee fringe benefits.
- Deferred Tax Liability: Identifying tax amounts that would otherwise be accrued to future periods in view of timing adjustment.
Some examples of financial accounting include:
- Revenue Recognition: An example where there is realization of revenue when a sale has been completed and not when the payment is made.
- Expense Matching: Accruing expenses incurred in obtaining the goods as and when the associated revenue is earned.
- Asset Valuation: It means that the items of reporting machinery are recorded at cost on the balance sheet.
Conclusion
The purpose of tax accounting and for that matter, financial accounting are vital to the financial system but not overlapping.
Tax accounting reviews and minimizes legal taxes and liabilities while financial accounting gives a clear reflection of an entity’s financial outlook.
It is common that both disciplines are valuable for businesses, investors, and regulators for purposes of duty, decision-making, and law compliance.
Appreciation of their concepts, approaches and uses allows the management teams and investors to respond adequately to the challenges characterizing the contemporary business environment.
FAQs
1. What Is the main reason / purpose of Tax Accounting?
In other words, it is the goal of tax accounting to meet the requirements of the applicable tax legislation provided by the government with the help of precise and timely filed tax returns.
2. What should one possess to become a tax accountant?
Tax Accountants require a bachelor’s degree in accounting, finance or any relevant fields of specialization.
3. What is the distinction between a Tax Accountant and a Management Accountant?
The tax accountant assists individuals or companies regarding tax issues in addressing taxation, on the other hand, management accountants assist an organization in the provision and analysis of the financial data needed for decision-making.
4. Which taxes are familiar for businesses?
Most entities encounter national income taxes, payroll taxes, sales and use taxes, property taxes, and possibly other taxes that depend on specific fields and states.
5. In what way does tax accounting assist in tax planning?
Tax accounting assists in realizing and planning for possible tax loss, deductions that can be claimed, and other tax credits, and income control strategies.
This makes it possible for companies to know when expected tax charges would be incurred and model their cash flows in a way, that they can avoid unnecessarily paying more taxes than are required while observing the tax laws.