Which branch of accounting embraces the preparation of various tax returns and tax planning necessary to minimize the impact of taxes on the firm?

Branches of Accounting and Users of Accounting Information

Exercise 2-1: IDENTIFICATION

Instruction: Identify the following statements.

1.It is primarily centered on the critical examination of financial statements by an independent

CPA to express an opinion regarding the fairness of the contents of the financial statements.

Auditing

2. It embraces the preparation of various tax returns and tax planning necessary to minimize

impact of taxed on the firm. Tax Accounting

3.It provides assistance to the management. Accountants generally provide industrial advice to

their clients regarding accounting, finance, budgeting, business policies, and organization

procedures, systems, product costs, distribution and other business activities. Management

Accounting

4.This is primarily concerned with the recording and classifying of business transactions

culminating in preparation of general-purpose financial statements or reports regarding the

business’ financial position, operating results and cash activities in accordance with the GAAP.

Financial Accounting

5.This refers to the accounting for the government and its instrumentalities, focusing attention

on the custody of public funds, the purpose or purposes to which such funds are committed,

and the responsibility and accountability of the individuals entrusted with such funds.

Government Accounting

What Is Tax Accounting?

Tax accounting is a structure of accounting methods focused on taxes rather than the appearance of public financial statements. Tax accounting is governed by the Internal Revenue Code, which dictates the specific rules that companies and individuals must follow when preparing their tax returns.

Key Takeaways

• Tax accounting is the subsector of accounting that deals with the preparations of tax returns and tax payments.
• Tax accounting is used by individuals, businesses, corporations and other entities.
• Tax accounting for an individual focuses on income, qualifying deductions, donations, and any investment gains or losses.
• For a business, tax accounting is more complex, with greater scrutiny regarding how funds are spent and what is or isn't taxable.

Understanding Tax Accounting

Tax accounting is the means of accounting for tax purposes. It applies to everyone—individuals, businesses, corporations, and other entities. Even those who are exempt from paying taxes must participate in tax accounting. The purpose of tax accounting is to be able to track funds (funds coming in as well as funds going out) associated with individuals and entities. 

Tax Accounting Principles vs. Financial Accounting (GAAP)

In the United States, there are two sets of principles that are used when it comes to accounting. The first is tax accounting principles and the second is financial accounting, or generally accepted accounting principles (GAAP).

Under GAAP, companies must follow a common set of accounting principles, standards, and procedures when they compile their financial statements by accounting for any and all financial transactions.  Balance sheet items can be accounted for differently when preparing financial statements and tax payables. For example, companies can prepare their financial statements implementing the first-in-first-out (FIFO) method to record their inventory for financial purposes, yet they can implement the last-in-first-out (LIFO) approach for tax purposes. The latter procedure reduces the current year's taxes payable.

While accounting encompasses all financial transactions to some degree, tax accounting focuses solely on those transactions that affect an entity's tax burden, and how those items relate to proper tax calculation and tax document preparation. Tax accounting is regulated by the Internal Revenue Service (IRS) to ensure that all associated tax laws are adhered to by tax accounting professionals and individual taxpayers. The IRS also requires the use of specific documents and forms to properly submit tax information as required by law.

Hiring a professional tax accountant is optional for an individual, but often necessary for a corporation, as business taxes are more complicated than personal taxes.

Types of Tax Accounting

Tax Accounting for an Individual

For an individual taxpayer, tax accounting focuses solely on items such as income, qualifying deductions, investment gains or losses, and other transactions that affect the individual’s tax burden. This limits the amount of information that is necessary for an individual to manage an annual tax return, and while a tax accountant can be used by an individual, it is not a legal requirement.

Meanwhile, general accounting would involve the tracking of all funds coming in and out of the persons' possession regardless of the purpose, including personal expenses that have no tax implications.

Tax Accounting for a Business

From a business perspective, more information must be analyzed as part of the tax accounting process. While the company’s earnings, or incoming funds, must be tracked just as they are for the individual, there is an additional level of complexity regarding any outgoing funds directed towards certain business obligations. This can include funds directed towards specific business expenses as well as funds directed towards shareholders.

While it is also not required that a business use a tax accountant to perform these duties, it is fairly common in larger organizations due to the complexity of the records involved.

Even legally tax-exempt organizations use tax accounting as they are required to file annual returns.

Tax Accounting for a Tax-Exempt Organization

Even in instances where an organization is tax-exempt, tax accounting is necessary. This is due to the fact that most organizations must file annual returns. They must provide information regarding any incoming funds, such as grants or donations, as well as how the funds are used during the organization’s operation. This helps ensure that the organization adheres to all laws and regulations governing the proper operation of a tax-exempt entity.

Which branch of accounting embraces the preparation of various tax returns and tax planning necessary to minimize impact of taxes on the firms?

Which branch of accounting is used for tax purposes?

Which branch of accounting is primarily concerned with the preparation of specific purpose financial statements for the management to base financial decisions on?

Which branch of accounting is concerned with analyzing cost of products or services rendered in a business?