Differences Between Tax Accounting and Generally Accepted Accounting Principles

As one might wonder that the job of a tax accountant is very complicated. Yes, you guessed it right. Handling all those numbers for the best interests of an organization is challenging. Making it even more difficult is the accounting principle that every business needs to stick to. All these principles influence every activity right from operations to selling.

We know that all accounting statements differ from one another. Even though we have a uniform matter to record transactions, it doesn't always lead to accurate comparisons. This is where tax accounting differs from generally accepted accounting principles. 

Basic Points of Difference

Understanding the difference between both of these types of accounting can help your Pasadena accountant to understand tax services according to the place. Not only the accountant but the entire organization should know the primary points of difference. So, let's take a look at each of them.

The Primary Purpose

In the US, the generally accepted accounting principles provider practices and standards to bring uniformity in financial statements. It's basically to enable comparison.
On the other hand, tax accounting unable to find a book to calculate tax in comparison to net earnings. One can easily see the difference between taxable income as defined by GAAP and by the tax services in Pasadena TX.

The History

Both of these types of accounting have a different history. Standardization was the main aim of GAAP. The accounting principles were suggested by the highest authority in the United States. Since then, these have been the main accounting framework.
Tax accounting was regulated by the 16th amendment of the US Constitution. The internal revenue Service was the highest authority that governs, orders, or reorganizes the taxation system of the country.

The Basis for Accounting

While maintaining the financial statements of a firm, the accountant determines the way to report some transactions. All these transactions need a basis that is the accrual basis. This accounting principle comes under GAAP. Because of their standardization process, accounting principals do not provide many alternatives. Whereas tax accounting, being suitable for smaller companies, have more flexibility.

The Basis of Depreciation

Depreciation has to be accounted for in every business. It is the estimated cost of an asset in a year. Under the US deposition method, accounting principals provide for different depreciating alternatives. For example, declining balance and the straight-line method.
In Tax accounting, the IRS defines percentages that are used to allow depreciation. Its to maintain standardization in the taxpayers' expenses.

The Matter of Accrual

When we use financial statements under GAAP, all expenses and incomes that are accrued but not paid and received are shown in the balance sheet. This is in case the liability is paid on a later date on, and income is realized after it has been accrued.

On the other hand, tax accounting practices do not consider the accrual basis. The IRS imposes radius limitations for revenue, income, expense, and modifying basic accounting. It works mostly on the cash and income basis.

Which tax accountant can you trust?

When you look for a Pasadena tax accountant, you need to make sure that he knows how the generally accepted accounting principles along with the practices in tax accounting. It's about sticking to the companies customs while operating only in the legal environment imposed by the authorities. Also, ensure that a person is qualified enough to work as a tax accountant in a reputed firm.