Tax Accounting

Tax Accounting
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What it is:
Tax accounting focuses on the preparation, analysis and presentation of tax returns and tax payments.
How it works (Example):

For example, Company XYZ might use one accounting method for calculating depreciation when it reports financial results
to investors, but tax laws may require it to use a different method for tax accounting purposes. As a result, Company XYZ
might have one net income number on the financial statements filed with the SEC and a different net income number filed
with the IRS.
Why it Matters:
Although tax accounting largely follows generally accepted accounting principles (GAAP), in a few ways it is quite different.
This is why you might hear analysts discussing the difference between "book and tax," meaning the differences between
GAAP accounting and tax accounting. Tax accounting takes special training and education, which is why some accountants
specialize only in taxes.
Accounting
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What it is:
Accounting is the process of systematically recording, measuring, and communicating information about financial
transactions.
How it works (Example):

At the heart of accounting is the double-entry bookkeeping method. This involves making at least two recording entries for
every transaction: a debit in one account and a credit in another account. The method helps prevent errors because the
sum of the debits should equal the sum of the credits. The three major financial statements produced by accounting are
the income statement, the balance sheet, and the cash flow statement.
Accounting can be done on a cash basis (cash accounting) or on an accrual basis (accrual accounting). Cash accounting
records cash inflows and outflows in the period in which they occur. Accrual accounting records income and expenses in
the period to which they are attributable rather than when cash payments come and go. For example, a check written in
April for March's utilities would appear as a March expense under the accrual method and as an April expense under the
cash method.
There are two general kinds of accounting. Financial accounting is the recording and communication of economic
information in accordance with Generally Accepted Accounting Principles (GAAP) and is primarily for external users.
Managerial accounting is the recording and communication of economic information that may or may not be in accordance
with GAAP and is for internal users. Other accounting specialty areas exist, such as tax accounting, oil and gas accounting,
or forensic accounting.
There are two kinds of users of accounting information: internal users and external users. Internal users are usually
company managers who use accounting information to decide how to plan and control operations on a daily and long-term
basis. External users are existing or potential investors, creditors, analysts, financial advisers, regulatory authorities,
unions, and the general public. They use accounting information to make a myriad of decisions about whether to buy, hold,
sell, lend, continue a relationship, or make an agreement.
The Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC), the IRS, and other
regulatory bodies set accounting standards and requirements for accounting frequency and presentation.
Why it Matters:
Accounting is tremendously important because it is the language of
business, and it is at the root of making informed business decisions.
Without accounting, managers would not know which products were
successful, which business decisions were the right ones, and whether the
company was earning money. It would not know how much to pay in taxes,
whether to lease or buy an asset, or whether to merge with another
company. In short, accounting doesn't just count the beans, it measures a
company's success at meeting its goals and it helps investors understand how efficiently their economic resources are
being used. This is why companies must be proficient in accounting in order to make good decisions.
Accounting can be controversial, in that accounting rules and methods are sometimes subject to interpretation or can
appear to distort a company's true performance. This is another important reason that effective leaders and managers
must thoroughly understand the accounting impact of their decisions.

Tax Accounting

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