Differences between management and tax accounting
Financial accounting and reporting are only part of the broad field of accounting. Other significant kinds of accounting include management accounting and tax accounting.
While both are essential in providing financial information, their focus and objectives differ significantly. Here are some key differences between management accounting and tax accounting
Management Accounting
Management accounting is internal accounting designed to meet the information needs of managers. Although the same accounting system usually accumulates, processes, and disseminates both management and financial accounting information, managers’ responsibilities for making decisions and planning and controlling operations at various administrative levels of a business enterprise or not-for-profit organization require more detailed information than is considered necessary or appropriate for external financial reporting.
Management accounting includes information that is normally not provided outside an organization and is usually tailored to meet specific management information needs. Management accountants analyze balance sheets, profit and loss statements and cash flow statements. They are responsible for providing guidance to senior management in areas such as strategic planning, budgeting and capital budgeting.
In order to achieve this, they need to have the technical skills and the depth of knowledge in accounting, finance, business, economics and management to work effectively with management.
Management accounting focuses on the future. It uses information from the past to make forecasts about the future. This information can be used to help managers make informed decisions about the future of the business.
Tax Accounting
Tax accounting is the process of calculating and preparing tax returns. It is the process by which a business calculates its tax obligations by calculating and reporting business income and deducting business expenses.
Tax accounting focuses on the past. It uses information from the past to determine the company’s tax liability. This information can be used to help the company comply with tax laws and regulations.
Tax accounting provides appropriate information needed by individuals, corporations, and others for preparing the various returns and reports required to comply with tax laws and regulations, especially the Internal Revenue Code. It is significant in the administration of domestic tax laws, which are to a large extent self-assessing.
Tax accounting is the management of tax-related financial activities in a business. Tax accounting may include taxes that are charged on business earnings such as income tax, the tax to be paid on the investment of savings, the tax to be paid on the interest earned by the bank, tax on sales of goods and services and many other. The tax accounting department calculates the tax payable on the items of the business on a monthly, quarterly, half-yearly, yearly or full-yearly basis.
Tax accounting is based generally on the same procedures that apply to financial reporting. However, there are some significant differences, and taxing authorities have the statutory power to prescribe the specific information they want taxpayers to submit as a basis for assessing the amount of income tax owed and do not need to rely on information provided to other groups.
Method of Accounting
Management accounting: Management accounting is not bound by generally accepted accounting principles (GAAP). This means that management accountants can use a variety of accounting methods to provide information that is most useful to managers.
Tax accounting: Tax accounting is bound by GAAP and tax laws and regulations. This means that tax accountants must use specific accounting methods to prepare tax returns and comply with tax laws.
Conclusion
In addition to the differences listed above, management accounting and tax accounting are also different in terms of their complexity, their level of detail, and their frequency. Management accounting is typically more complex and detailed than tax accounting. It is also prepared more frequently than tax accounting.