Tax Accounting Basics

Tax Accounting Basics

Tax accounting is one of the most fundamental services for almost every individual or business. In basest form, it refers to the rules used in generating tax assets, as well as liabilities in the accounting records of said individual or business.

The term ‘Tax Accounting’ is derived from Internal Revenue Code (IRC). People sometimes believe it has its roots in one of the accounting frameworks, such as GAAP or IFRS. However, such belief is utterly incorrect.

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1. Variation in Tax Accounting

Tax accounting might result in the generating a taxable income figure. This figure varies from the income reported on a subject’s income statement. The reason behind this difference is that the tax rules might cause an acceleration or a delay in the recognition of certain expenses. Such expenses would normally receive recognition in a reporting period. These differences are supposed to be temporary because the assets will eventually go into recovery and their liabilities will be settled. Naturally, the differences will be eliminated at this point.

2. Temporary Difference

Sometimes, a difference results in a taxable amount. If it occurs during the later period, it is called a taxable temporary difference. However, if such a difference occurs in the in a deductible amount during the later period, it is called a deductible temporary difference.

Following are a few examples of temporary differences are:

• Any revenues, earnings or gains which were taxable prior to, or after the recognition in the financial statements. Such as, any legal allowance for doubtful accounts might not have immediate tax deductibles. However, it must be deferred until or unless certain receivables are officially declared bad debts.

• Expenses, spendings or losses which were tax deductible prior to, or after the recognition in the financial statements. Such as, there are some fixed assets which are immediately tax deductible. However, they can only gain recognition through a long-term dedicated depreciation in the financial statements.

• The assets whose tax basis sees a reduction because of the investment tax credits.

3. Tax Accounting Recognition

The necessary tax accounting services are derived from a basic need to recognize two things. They are The Current year. There must be a recognition of certain tax liability or tax asset. Said recognition must come from the projected amount of income taxes payable or refundable. specifically, for the current year. The Future years. The must be a recognition of a deferred tax liability or tax asset. Said recognition must come from the estimated effects of carryforwards and temporary differences, for the future years.

What is General Accounting for Income Taxes?

The general accounting for income taxes means many things. However, the most important things about

this are:

1. Creation of a tax liability for the projected taxes payable. You could also create a tax asset for tax refunds. It must relate to the current or by-gone years.

2. Creation of a deferred tax liability for the appraised future taxes payable. Similarly, you could create a deferred tax asset for the estimations of future tax refunds. These refunds can be attributed to the temporary differences and carryforwards.

3. Calculation of the total income tax expense in said time period.