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What Are the Differences between GAAP and Tax Accounting?

K.C. Bruning
K.C. Bruning

The major differences between generally accepted accounting principles (GAAP) and tax accounting are the rules that each method follows. These rules apply to the 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. Due to the different ways 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 built and expanded with the purpose of ensuring that financial reporting is fair and accurate. As tax accounting is a government-led system, it tends to be tied in with political motivations.

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Woman posing

Different perspectives on a business are provided by GAAP and tax accounting methods. The GAAP method provides more detail about a company and gives a better overall picture of its status. Though it can reveal much about a business, tax accounting is less detailed as it typically only shows what is required to be reported to the government.

The GAAP and tax accounting methods are different enough that it may require two accounting professionals, each specializing in one of the methods, to do taxes for an organization. This is partly because the accountant must understand the current requirements of each method. Knowing these details is particularly important with tax accounting, which includes the preparation of reports that must be submitted in a certain format and by specific deadlines. In essence, the GAAP method is an overall, everyday method of accounting, while tax accounting is a means by which income can be reported to the government.

Many companies use both GAAP and tax accounting methods. They will tend to focus on GAAP when thinking of building company profitability. As the tax method is a requirement, a company will more likely to consider how a move will affect reporting, rather than to include it in any sort of growth strategy.

Most companies who do not use both of these methods will use another overall method, as tax reporting is a legal requirement. Another common accounting method is the international financial reporting standards (IFRS). It is primarily used by larger companies that have an international presence whether by having several worldwide branches or global business partners. This is a more precise system than the GAAP method because it is meant to be understood by a diverse audience and thus must be more streamlined.

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