Difference Between GAAP Accounting and Tax Accounting

Edited by Diffzy | Updated on: September 24, 2022

       

Difference Between GAAP Accounting and Tax Accounting Difference Between GAAP Accounting and Tax Accounting

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Introduction

Various accounting systems are employed for multiple purposes, including the preparation and maintenance of various reports. Business accounting records a company's financial transactions, which can be done using GAAP or tax accounting. The Generally Accepted Accounting Principles (GAAP) document public corporations' economic activities, whereas tax accounting is similar except that taxpayers have more alternatives. To choose which accounting system is best for your firm, you must first understand these methods and how they differ. Accounting is required since it provides a summary of financial information. Accounting is performed by all businesses and organizations to determine their ultimate budget and costs. Accounting may be accomplished using a variety of approaches. There is also a plethora of accounting software on the market to make things even easier.

Although both GAAP and Tax Accounting are accounting methodologies, they serve different objectives. They use various methods and follow other techniques. GAAP accounting is more complex and requires more knowledge since it necessitates technical abilities that you can only acquire via years of practice. The goal of GAAP is to establish a standardized set of standards and accounting principles to strengthen the dependability and comparability of financial statements by bringing consistency and relevance. The Internal Revenue Service, or IRS, develops and maintains the tax accounting framework. This framework aims to levy tax on a corporation's taxable income or net earnings. Revenue is not the same as taxable income (as defined by GAAP). The tax is subtracted and collected when you get cash or earn money.

GAAP Accounting vs. Tax Accounting

The fundamental distinction between GAAP accounting and tax accounting is that GAAP accounting is based on standardized accounting and principles produced by the financial accounting standard board. On the other hand, tax accounting is created by a government-run tax department and is based on tax principles and laws. The acronym GAAP stands for widely recognized accounting principles. The FASB, or Financial Accounting Standard Board, has produced a set of accounting principles and procedures. It is the most frequent way of creating easily comparative and understood financial reports or records.

A tax accounting rule or principle is used while computing taxes. It has nothing to do with publicly available financial figures. Tax accounting principles and regulations are issued or controlled by the Internal Revenue Code. Organizations and individuals follow the requirements established by the Internal Revenue Code while creating or filing tax reports or returns.

Difference Between GAAP Accounting And Tax Accounting in Tabular Form

Table: GAAP Accounting vs. Tax Accounting
Parameters Of Comparison
GAAP Accounting
Tax Accounting
Meaning
GAAP accounting is the approach that every company or organization uses to create financial reports or statements.
Tax accounting refers to the concepts or regulations that regulate the government's tax reporting.
Principles used
GAAP regulations are standardized rules and principles established by FASB.
Tax accounting follows tax regulations and codes established by the Tax department.
Accounting foundation
The accrual method is used in GAAP accounting.
The basis of tax accounting might be accrual, modified, or cash.
Accounting and regulatory operators oversee GAAP accounting processes.
Tax regulators govern tax accounting procedures.
Transactions Included
GAAP includes and reports all sorts of transactions in the financial statement.
Only transactions relating to taxable income are included in the Tax accounting approach.
Complication Or Conflict
The GAAP Accounting approach entails more complicated stages and requirements.
On the other hand, tax accounting requires fewer technical skills and is less complicated.
Depreciation Applied
Different accounting techniques are utilized under GAAP accounting, such as the diminishing or declining balance method, the straight-line method, the sum of the year digit approach, and the activity-based depreciation method.
The MARCS, or Modified Accelerated Cost Recovery System, computes depreciation using IRS-defined falling percentages.
Accrual Accounting
In the balance sheet, due costs not yet paid are classified as accruals.
However, in tax accounting, accrual-based accounting is not necessary unless a corporation reports its business tax returns as an accrual-based taxpayer.
Purpose
The goal of GAAP is to establish a consistent set of standards and accounting principles to achieve consistency.
The Internal Revenue Service, or IRS, develops and maintains the tax accounting structure.

What Is GAAP Accounting?

GAAP accounting is accounting in accordance with the 'Generally Accepted Accounting Principles.' GAAP accounting is the compilation of financial statements in line with the specific jurisdiction's standardized accounting laws and principles. The Financial Accounting Rules Board publishes a collection of accounting principles, standards, and processes known as generally accepted accounting principles (GAAP) (FASB). When their accountants create their financial accounts for public corporations in the United States, they must adhere to GAAP.

  • GAAP is the set of accounting rules established by the FASB that U.S. corporations must adhere to while preparing financial statements.
  • GAAP attempts to enhance financial information transmission's clarity, uniformity, and comparability.
  • GAAP is distinguished from pro forma accounting, a non-GAAP financial reporting approach.
  • GAAP's overarching purpose is to guarantee that a company's financial statements are complete, uniform, and comparable.
  • Ten basic ideas guide the principles of GAAP.

Purpose Of GAAP

The primary goal of GAAP accounting is to guarantee that financial statements generated by various businesses in the same jurisdiction are comparable. Accordingly, all public companies are expected to use GAAP accounting when presenting their financial results.GAAP accounting uses an accrual foundation of accounting, which means that revenue and costs are recorded as they are incurred, regardless of the exchange of actual currency. Accounting and regulatory boards in each nation govern GAAP accounting.

GAAP's Principles laid forth ten general ideas.

  1. The Regularity Principle- As a standard, the accountant followed GAAP standards and regulations.
  2. The Consistency Principle-Accountants agree to use the same standards throughout the reporting process to ensure financial comparability from one period to the next. Accountants are expected to thoroughly disclose and explain the reasons for any revised or updated standards in the financial statements' footnotes.
  3. Sincerity Principle- The accountant works hard to offer an accurate and unbiased representation of a company's financial status.
  4. Methods Permanence Principle- Financial reporting methods should be consistent, enabling the company's financial information comparison.
  5. The Non-Compensation Principle- Both negatives and positives should be disclosed completely transparently and without regard for debt repayment.
  6. Prudence Principle- This focuses on fact-based financial data display that is free of conjecture.
  7. The Continuity Principle- When evaluating assets, the assumption should be that the business will continue to run.
  8. Periodicity Principle- Entries should spread throughout the relevant time periods. Revenue, for example, should be recorded in the applicable accounting period.
  9. Materiality Principle- Accountants must work hard to fully disclose all financial data and accounting information in financial reports.
  10. The principle of absolute good faith is derived from the Latin phrase uberrimae fidei, which is used in the insurance sector. It assumes that both sides are truthful.

What Is Tax Accounting?

Tax accounting is a set of accounting practices that focuses on taxes rather than the presentation of public financial statements. The Internal Revenue Code governs tax accounting, which specifies the particular procedures that businesses and individuals must follow while completing their tax returns. Tax accounting is a form of accounting that employs the same ideas and processes as those used to generate an entity's tax return. The goal of tax accounting is to create financial statements in accordance with taxation rules so that you can track the entity's taxable revenue throughout the year. Taxable income may differ from income derived through GAAP accounting. This distinction may occur because tax laws might accelerate income recognition or postpone cost allowances that would otherwise be recognized on an accrual basis under GAAP accounting. Tax accounting attempts to overcome this gap by presenting taxable income. Tax law prescribes, and tax regulatory agencies in each country control tax accounting rules. Tax accounting only records transactions that have an influence on the entity's taxable revenue.

  • Tax accounting is the branch of accounting concerned with the preparation of tax returns and payments.
  • Individuals, enterprises, corporations, and other entities all employ tax accounting.
  • Individual tax accounting focuses on income, eligible deductions, gifts, and any investment profits or losses.
  • Tax accounting is more complicated for businesses, with increased scrutiny on how money is spent and what is or isn't taxed.

Identifying Tax Accounting

Tax accounting is a method of accounting that is used for tax purposes. It is applicable to all persons, enterprises, corporations, and other entities. Even people who are not required to pay taxes must participate in tax accounting. The goal of tax accounting is to track monies (both coming in and leaving out) linked with persons and corporations.

Types Of Tax Accounting

  1. Individual Income Tax Accounting- Tax accounting for an individual taxpayer focuses primarily on income, eligible deductions, investment gains or losses, and other activities that influence the individual's tax burden. This reduces the amount of information required for an individual to prepare an annual tax return, and while an individual can utilize a tax professional, it is not a legal obligation.
  2. Accounting for Taxes in a Business- More information must be reviewed as part of the tax accounting process from a business standpoint. While the company's revenues, or entering funds, must be handled in the same way as they do for individuals, any departing monies directed towards specific corporate commitments add an extra layer of complication. This includes monies allocated to exact company costs as well as funds allocated to shareholders.
  3. Tax Accounting for a Nonprofit Organization- Tax accounting is required even when an organization is tax-exempt. This is because most companies are required to file annual returns. 3 They must report information on any incoming finances, such as grants or gifts, and how the funds are used during the organization's functioning. This assists in ensuring that the organization complies with all rules and regulations governing the appropriate functioning of a tax-exempt business.

Main Differences Between GAAP Accounting And Tax Accounting in Points

  • GAAP accounting is the approach that every company or organization uses to create financial reports or statements. On the other hand, tax accounting refers to the concepts or regulations that regulate the government's tax reporting.
  • Tax accounting employs tax laws and concepts established by the Tax department. GAAP regulations are standardized rules and principles established by FASB.
  • All forms of transactions are included and reported in the financial statement under GAAP. However, only transactions relating to taxable income are included in the Tax accounting approach.
  • Tax accounting is less sophisticated and does not need numerous technical abilities. Whereas GAAP accounting requires additional skills due to its multiple methods, it also requires experience.
  • Tax accounting can be done on an accrual, adjusted, or cash basis. At the same time, the accrual foundation of GAAP accounting makes the information more apparent.
  • GAAP accounting provides a thorough picture of the entity's financial status since it records all transactions entered into by the company. It gives an accurate representation of the entity's assets and liabilities. Financial reports are generated using GAAP accounting. Tax accounting captures only transactions with a tax impact and provides a less reliable picture of the entity's overall financial status. It does, however, give a more reliable gauge of the entity's taxable revenue.
  • GAAP accounting is utilized by organizations that must disclose financial accounts to investors and other third parties. As a result, GAAP accounting is preferred by entities that demand precise reporting for financial analysis. At the same time, tax accounting is chosen by smaller firms that are not compelled to perform any public reporting and are merely concerned with tracking their taxable revenue.
  • GAAP accounting is more difficult to understand since it contains a myriad of accounting standards and concepts that must be applied to a wide range of activities. To use, a technical understanding of accounting concepts is required. Tax accounting is a simplified way of accounting since it only applies tax principles to transactions that have a minimal tax impact. In addition, these principles are more general since they are written to be more simply understood.

Conclusion

Accounting models can be chosen by entities based on their accounting objectives. GAAP accounting provides a more accurate and dependable representation of the entity's financial status. While public businesses are compelled to use GAAP accounting for reporting reasons, private organizations can use a simplified tax accounting system if they do not need comprehensive financial analysis reports and are more concerned with tracking their taxable revenue. Many businesses in the United States use both methods (i.e., GAAP accounting to meet their legal and financial reporting requirements and tax accounting to find out net tax obligations.)GAAP Accounting is a technique that includes basic concepts and standards that are applied to financial statements or balance sheets to make them clearer and easier to compare. This results in a clear picture of profit and loss statements. While the Tax accounting technique is only relevant to tax revenues or reports and is not applicable to public accounts, only some companies create tax reports.


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"Difference Between GAAP Accounting and Tax Accounting." Diffzy.com, 2022. Fri. 09 Dec. 2022. <https://www.diffzy.com/article/difference-between-gaap-accounting-and-tax-accounting-347>.



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