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Why are Tax Accounting Standards Essential?

Tax accounting remains an important domain in the field of finance. Therefore, it is necessary for businesses to have an adequate knowledge about different methods of tax accounting. Depending upon the size as well as nature of business, they can select a suitable method.

The rules for financial and tax accounting addresses to different requirements, are based on a different set of principles and have different objectives. Though both the set of rules are utilized for measurement of annual results of an organization, differences in the methods utilized and results need to be accepted. Financial accounting considers an organization to be an economic entity while taxation is based on separate entity approach.

Unlike the Generally Accepted Accounting Principles (GAAP), the field of tax accounting encompasses a broad set of regulations and laws that requires businesses to present income tax information. Identical to federal income tax, the tax accounting standards are also regulated at national level.

The national as well as the global business community holds the opinion that policy makers as well as tax authorities need to understand why the results depicted by financial reports of an organization differ from taxable results of the same organization.

Tax accounting needs careful analysis as well as application of regulation provisions, tax codes, case laws as well as administrative procurements. The accepted tax accounting standards differ from the concepts utilized for financial accounting as well as reporting purposes. Moreover, the tax laws also provide for the non-fiscal objectives like granting specified incentives (promotion of self-financing, focus on specific business activities as well as research and development). Besides this, the tax laws might be designed for influencing the behavior of organizations by offering tax-relief or granting tax incentives. In addition, the taxation system of a nation is a generally a result of political decision-making process.

Different approaches are utilized for calculation of taxable profits in different countries. These include the concepts of dependence and independence. The concept of dependence implies that the profits generated through commercial accounts must be considered the fundamental basis for assessment of taxes. However the concept of independence utilizes two different sets of rules, one for tax purposes and other for commercial results.

Different nations follow different approaches to the relationship between tax and commercial accounting. Both the approaches have shortcomings and advantages. However, the recognized principles of taxation must not be overlooked in both the cases.