[ad_1]
GAAP and tax accounting have different rules and motivations, with GAAP providing more detail and a better overall picture of a company’s health. Both methods are necessary for tax filing, and larger companies with international presence may use International Financial Reporting Standards (IFRS).
The main differences between generally accepted accounting principles (GAAP) and tax accounting are the rules that each method follows. These rules apply to uses of cash or accrual accounting and are developed based on the nature and motivation of the groups that set them. GAAP guidelines are set by a regulatory group known as the Financial Accounting Standards Board (FASB), while tax accounting guidelines are set by the government. Because of the different ways that these methods compile information, they also tend to show different, though often overlapping, views of a business.
A significant difference between GAAP and tax accounting is the motivation for creating the guidelines for each method. The GAAP method has been created and expanded to ensure that financial information is fair and accurate. Because tax accounting is a government-run system, it tends to be linked to political motivations.
GAAP and tax accounting methods provide different perspectives on a business. The GAAP method provides more detail about a company and offers a better overall picture of its health. While it can reveal a lot about a business, tax accounting is less detailed, typically only showing what needs to be reported to the government.
The GAAP and tax accounting methods are sufficiently different that it is necessary for two accounting professionals, each specializing in one of the methods, to do an organization’s taxes. This is partly because the accountant must understand the current requirements for each method. Knowing these details is particularly important with tax accounting, which includes preparing reports that must be filed in a certain format and by specific deadlines. In essence, the GAAP method is a general and daily method of accounting, while tax accounting is a means by which income can be reported to the government.
Many companies use GAAP and tax accounting methods. They tend to focus on GAAP when thinking about increasing the profitability of the company. Since the tax method is a requirement, a company is more likely to consider how a move will affect reporting, rather than factor it into any kind of growth strategy.
Most companies that do not use both methods will use another general method, since tax filing is a legal requirement. Another common accounting method is International Financial Reporting Standards (IFRS). It is mainly used by larger companies that have an international presence, either by having multiple global branches or global business partners. This is a more accurate system than the GAAP method because it is intended to be understood by a diverse audience and therefore needs to be more streamlined.
Smart Asset.
[ad_2]