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What Is Tax Accounting?
Tax accounting is a structure of accounting methods focused on taxes rather than the appearance of public financial statements. Tax accounting is governed by the Internal Revenue Code, which dictates the specific rules that companies and individuals must follow when preparing their tax returns.
Tax accounting is the subsector of accounting that deals with the preparations of tax returns and tax payments.
Tax accounting is used by individuals, businesses, corporations and other entities.
Tax accounting for an individual focuses on income, qualifying deductions, donations, and any investment gains or losses.
For a business, tax accounting is more complex, with greater scrutiny regarding how funds are spent and what is or isn't taxable.
Tax Accounting Explained
Tax accounting is the means of accounting for tax purposes. It applies to everyone—individuals, businesses, corporations, and other entities. Even those who are exempt from paying taxes must participate in tax accounting. The purpose of tax accounting is to be able to track funds (funds in as well as funds going out) associated with individuals and entities.
Tax Principles vs. GAAP
In the United States, there are two sets of principles that are used when it comes to accounting, which, it should be noted, are different and should not be confused. The first is tax accounting principles and the second is financial accounting, or generally accepted accounting principles (GAAP).
Under GAAP, companies must follow a common set of accounting principles, standards, and procedures when they compile their financial statements by accounting for any and all financial transactions.1 Balance sheet items can be accounted for differently when preparing financial statements and tax payables. For example, companies can prepare their financial statements implementing the first-in-first-out (FIFO) method to record their inventory for financial purposes, yet they can implement the last-in-first-out (LIFO) approach for tax purposes. The latter procedure reduces the current year's taxes payable.
While accounting encompasses all financial transactions to some degree, tax accounting focuses solely on those transactions that affect an entity's tax burden, and how those items relate to proper tax calculation and tax document preparation. Tax accounting is regulated by the Internal Revenue Service (IRS) to ensure that all associated tax laws are adhered to by tax accounting professionals and individual taxpayers.2 The IRS also requires the use of specific documents and forms to properly submit tax information as required by law.Basic Bookkeeping and Working With an Accountant
A little basic bookkeeping can go a long way in keeping your business organized and profitable. Learn what you'll need to know and how to find qualified professionals to help you.
If you want to succeed in business, you need to know about financial management. No matter how skilled you are at creating a product, providing a service, or marketing your wares, the money you earn will slip between your fingers if you don't know how to efficiently collect it, keep track of it, save it and spend or invest it wisely.
Poor financial management is one of the leading reasons that businesses fail. In many cases, failure could have been avoided if the owners had applied sound financial principles to all their dealings and decisions. Financial management is not something that you can leave to your banker, financial planner or accountant—you need to understand the basic principles yourself and use them on a daily basis, even if you plan to leave the more complicated work to hired professionals.
Your Basic Bookkeeping
To succeed in business, one of your most important tools is financial analysis, based on your business records. Accurate financial records will help you answer some very important questions, such as:
Are you making money, or losing it? How much?
Is your business on sound financial ground?
Is financial trouble lurking ahead?
A sound bookkeeping system is the foundation on which all of this valuable financial information can be built.