Difference Between GAAP Accounting and Tax Accounting (With Table)

Accounting is necessary as it gives a summary of financial details. All companies and organizations do accounting for knowing their final budget and expenses. There are several methods available with the help of which accounting is done. And for making it easier, there are hundredths of software in the market that does the accounting job.

GAAP Accounting and Tax Accounting are accounting methods, but both are used for different purposes. Both of them have different approaches and procedures. GAAP Accounting is more difficult and requires more knowledge as it requires some technical skills which can be gained after years of experience.

GAAP Accounting vs Tax Accounting

The difference between GAAP accounting and Tax accounting is that GAAP accounting is created by the financial accounting standard board and is based on standardized accounting and principles. On the other hand, Tax accounting is generated by a countries Tax department handled by the government and is based on Tax principles and rules.

GAAP is also called generally accepted accounting principles. It is a set of accounting principles and rules which is created by the FASB or financial accounting standard board. It is the most common method for generating financial reports or records which are easily comparable and understandable.

Tax accounting is a taxation rule or principle that is applied while calculating tax. It is not related to public financial statements. The internal revenue code issues or controls Tax accounting principles and guidelines. And the rules generated by the internal revenue code are followed by the organizations and individuals for making or preparing Tax reports or returns.

Comparison Table Between GAAP Accounting and Tax Accounting

Parameters of ComparisonGAAP AccountingTax Accounting
Definition GAAP accounting refers to the method that is used by every company or organization for making their financial reports or statements. Tax accounting refers to the principles or rules applied to tax reports generated by the government.
Principles applied The rules applied in GAAP are standardized rules and principles set by FASB. In Tax accounting tax rules and principles are applied which are set by the Tax department.
Basis of accountingThe basis of GAAP accounting is accrual. The basis of Tax accounting can be accrual, modified, or cash basis.
Operated byGAAP accounting methods are regulated by accounting and regulatory operators. Tax accounting methods are regulated by tax regulatory operators.
Included transactions In GAAP all types of transactions are included and are reported in the financial statement. In Tax accounting method only transactions related to taxable income are included.
Intricacy or complexity GAAP Accounting method includes more complex steps and rules. Tax Accounting does not require too many technical skills and is less complex.

What is GAAP Accounting?

GAAP Accounting is a standard accounting method used by most companies and organizations for maintaining their financial data records briefly and clearly. The reports generated by using this method are easily comparable and easy to understand. Balance sheets, financial statements, and income statements, etc., are created by using this.

GAAP Accounting uses some principles and rules which are set by FASB or the financial accounting standard board. It stands for generally accepted accounting principles. This method is very complex because many things are calculated during the application of the GAAP method.

This method requires skills as well as experience. The final report created by using this method also includes extraordinary items, which are showed below the statements. The inventory cost method used here is the last in, first out, or LIFO method.

What is Tax Accounting?

The Tax Accounting method is totally related to tax report preparation. The rules and guidelines applied in this method are set by the government, and the total method is controlled by the internal revenue code. And the rules issued should be followed by each company and individual while preparing tax reports.

The Tax Accounting method differs in individual and organizations calculations ways. As for an individual, it is focused mostly on income, investment profits, or losses, etc. But when it comes to a company, it becomes complicated as many things are calculated with proper security measures.

In Tax Accounting, both last in, first out, and first in, last out methods are used. If Taxes are not calculated properly or if some malicious practices are included, these accounts of criminal activity and specified actions can be taken by the government.

Main Differences Between GAAP Accounting and Tax Accounting

  1. GAAP accounting refers to the method that is used by every company or organization for making their financial reports or statements. On the other hand, Tax accounting refers to the principles or rules applied to tax reports generated by the government.
  2. In Tax accounting, tax rules and principles are applied, which are set by the Tax department. While the rules applied in GAAP are standardized rules and principles set by FASB.
  3. In GAAP, all types of transactions are included and are reported in the financial statement. Whereas in Tax accounting method, only transactions related to taxable income are included.
  4. Tax Accounting does not require too many technical skills and is less complex. Whereas in GAAP accounting, more skills are required as it needs experience because of its complicated steps.
  5. The basis of Tax accounting can be accrual, modified, or cash basis. While the basis of GAAP accounting is accrual which makes the statements more clear.

Conclusion

A good sophisticated report leads to a clear vision. Therefore the accounting methods used in making these reporters should have to be clear and understandable that will lead to a report or statements that are organized. Sometimes the Principles and rules used in these methods are fixed and cannot be modified, but others can be modified as per convenience. The complexity of these methods depends on their included items. As more the items or expenses, there will be more complexity.

GAAP Accounting is a procedure that contains some principles and rules which are applied to the financial statements or balance sheets to make them more clear and easily comparable. This leads to a clear vision of profit and loss statements. While the Tax accounting method is applicable only for tax revenues or reports and it is not for public reports, only specified organizations prepare tax reports.

References

  1. http://public.kenan-flagler.unc.edu/faculty/langm/bllw_0302.pdf
  2. https://www.emerald.com/insight/content/doi/10.1108/02686900610661397/full/html
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