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In: Accounting

Why are there differences between tax accounting and financial reporting? What are the differences in goals...

Why are there differences between tax accounting and financial reporting? What are the differences in goals of the two reporting systems?

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Expert Solution

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 done to calculate taxable income and allowable expenses for the purpose of calculating the income tax payable on the income earned. It is prepared for the purpose of tax authorities.

Financial reporting:

Financial reporting is the process of producing statements that disclose an organization's financial status. The objective of financial reporting is “to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.The users of financial reporting are shareholders, investors, employees, etc. who are interested in evaluating the company's result and its future. The impact of tax calculated in tax accounting is also reported in the financial reporting. It is governed by relevant laws such as the Companies Act, GAAP (Generally Accepted Accounting Principle) and are published in case of public and listed companies.


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