Financial accounting and tax accounting – both these are crucial terms for any business irrespective of its size. Whether you’re into digital marketing or traditional marketing, finance and tax will be two most concerning factors that will tell the business growth and its performance. But the problem is businesses don’t know the difference between tax accounting and financial accounting due to which they fail to meet and fulfill requirements of the business. Do you know the exact difference between these two terms? If no, then you spotted the right place. This article is a complete guide highlighting the difference between tax accounting and financial accounting. By the end of this article, you will have enough knowledge on both these terms.
So let’s start from the basics.
Definition of both the terms
Financial accounting – This is one of the biggest branch of accountings which involves a process of recording, summarizing, and reporting about transactions of businesses. These transactions basically summarize the preparation of financial statement of the organization such as balance sheet, cash flow statement, balance sheet, which records the company’s specific performance. In other words, financial accounting gathers the company’s data, information and then prepares a report.
Tax accounting – As the term suggests, it focuses on tax returns and payments instead of preparing the public financial statements. In simple words, tax accounting is cash based accounting whose primary focus is on cash receipts and cash payments rather than sales or purchase transactions.
For example, in the UK, the kind of tax you pay depends upon the nature of your business and determine if you’re a VAT registered.
Let’s move little further and talk about the difference below.
Major difference between tax accounting and financial accounting
– Impact on business
The first difference you can see between these two terms could be impact that they make on business. In case of financial accounting, it precisely tracks business transactions whenever they take place in the organization. However, it doesn’t show you a businesses’ actual cash reserve situation. As a small business, if you use correct method, you can generate a good amount of income.
On the other hand, tax based accounting lets small businesses to follow its cash situations more closely. But it may also divert business’ profitability if customers pay their bills in a single period, this cases a jump in a cash receipts.
The purpose of financial accounting is to gather financial information pertaining to the company or clients and help them in decision-making. Here the interested parties can be internal as well as external for getting financial information. According to International Accounting Standards Committee (IASC), the main purpose of accountingis to provide information to various users to improve their financial decision-making.
On contrary, the primary purpose of tax accounting is to finance public expenditure. In fact, there are some taxation measures that are there to improve economic decision-making.
– Working process
Financial accounting works based on accounting principles and these principles depend on the regulatory and reporting requirements of the business. For example, in the U.S. businesses are asked to perform financial accounting in compliance with generally accepted accounting principles (GAAP). This provides frequent information to investors, creditors, regulators, and tax authorities.
Whereas tax accounting can be performed by a business on its own or they can also take help of an accountant. A tax advisor can help you calculate how much tax you should pay. How to finance your future tax payments, and which tax accounting tactic will work for the business.
– Types of tax and financial accounting
There are two types of financial accounting. First is accrual method and second is cash method. In accrual method, companies are able to recognize revenue when it is earned, expenses when they occur, and when they’re paid also. Cash method on the other hand, records the revenue and expenses when the cash is exchanged between two parties.
Tax accounting has two main types i.e. direct and indirect. Direct tax includes property tax, income tax, wealth tax, and corporate tax. And indirect tax includes value added tax (VAT), service tax, sales tax, entertainment tax, etc.
Here we end the difference between tax accounting and financial accounting. I hope you read each and every difference thoroughly and grasp the meaning out of it. If you want to keep the financial stability of your business going on for a long term then you need to have proper knowledge of financial accounting and taxation. Only then you will be able to make good financial decision of your company. You can read the article again if still in doubt.
Well, you can also get in touch with us if you have any query related to accounting and taxation.