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What is tax accounting?

What is tax accounting?

Tax accounting is one of the branches of accounting that is concerned with preparing tax returns and payments related to taxes. Tax accounting is defined as one of the accounting methods that are concerned with taxes rather than focusing on financial statements, the aim of which is to keep track of money associated with individuals and other entities.

Tax accounting is related to the rules that are used to generate tax assets and liabilities found in the accounting records. Tax accounting is derived from law and is used in preparing tax returns and tax payments by individuals and companies.
What is tax accounting?
What is tax accounting?

Tax accounting for individuals focuses on income while being somewhat complicated with businesses where you need to scrutinize how money is spent and check what money is or is not taxed.

What are the types of tax accounting?

There are many types of tax accounting according to the people who are dealt with, whether individuals or companies, whether they are small companies or large multinational companies. They provide tax statements, which may be quarterly or annually, and they advise them.

Despite the different bodies that use tax accounting, everyone must use it, but each according to his own needs, and accordingly there are many types of tax accounting, which will be clarified as follows:

Individual tax accounting

Individual tax accounting is one of the types of tax accounting that focuses on the elements that affect the tax burden, such as income, profits, losses, and thus this type is considered a simple type because the information needed to manage an individual’s annual tax return is somewhat limited, so it is not necessary to hire a tax accountant but it is necessary to keep track of all money incoming and outgoing to avoid having it for tax purposes.

Business tax accounting

Business tax accounting is one of the most important things that need to be done that needs to analyze a huge amount of information, such as tracking company profits or incoming funds. Due to the complexity of the records associated with tax accounting, companies often turn to the use of a tax accountant.

Tax accounting for a tax-exempt organization

Tax accounting is important even in cases where organizations are tax-exempt because these organizations are required to provide annual returns, tax accounting for a tax-exempt organization is necessary because these organizations are obligated to provide any information related to grants or how funds received from donations are used This money, for example, Tax accounting helps to verify the organization's compliance with all laws and regulations that ensure the proper conduct of business.

Tax accounting is divided into three types; Tax accounting for an individual, tax accounting for business and tax accounting for a tax-exempt organization.

What is the importance of tax accounting?

There are many areas in which tax accounting is concerned, from services related to simple numbers of individuals to complex tax planning services for multinational companies. Tax accounting:
  • Preparing tax returns and calculating changes in income, whether for individuals or companies.
  • Participate in making decisions related to tax planning during the year.
  • Attempting to reduce inaccurate tax returns.
  • Create tax liabilities for estimated taxes due or due to future taxes.
  • Create a tax asset in order to recover taxes, whether for current or previous years.
  • Calculate the total income tax expense during a specific period.

What are the most important principles of tax accounting?

The most important basics of tax accounting are based on recognizing tax liabilities or tax assets for accrued or recoverable income taxes during the current year, while the focus is on recognizing tax liabilities or tax assets for future years based on the effects that are estimated in the future years.

Tax accounting is concerned with the methods and policies that are used to prepare tax returns, and tax accounting follows many principles that are consistent with generally accepted accounting principles, The maximum crucial of which can be the following:
  • Deferred tax assets: This principle is concerned with taxes that have been paid in advance on the balance sheet, which are in the form of a tax exemption, which will make the taxable profit higher than the accounting profit, and therefore this additional amount is a tax that will be obtained in later years.
  • Deferred tax obligations: It is the value of income taxes that must be paid during future periods, and this means an increase in profit during these periods, while taxes are increased during future periods, such as the depreciation of fixed assets.
  • Value Added Tax: It is the tax that is imposed as a result of the increase in the value of products or services during their useful life.
  • Transaction pricing: It is setting the prices of transactions between people so that a person does not benefit from goods or services at a cost less than the price at which they are sold.
  • Income classification: This principle is based on calculating the tax according to income, taking into account all receipts and payments necessary for calculating the accounting profit.

What is the difference between tax accounting and financial accounting?

Financial accounting is one of the branches of accounting that is concerned with tracking, recording and displaying the financial transactions of the company through financial reports or financial statements such as; Income statements or balance sheets, financial accounting follows generally accepted accounting principles.

In general, accounting follows two types of principles. The first type is the principles of tax accounting, and the second type is the generally accepted accounting principles, or what is known as financial accounting. There are many differences between these two types; According to the principles of financial accounting, all balance sheet items can be prepared in many ways, such as: using the first-in, first-out method or using the last-in, first-out method, while in tax accounting the accounting is concerned with the transactions that affect the tax burden.

Therefore, it is important to know the principles that must be followed from the beginning in order to ensure that the business runs in a correct manner and avoid increasing taxes on it, as you can hire a tax accountant to avoid any complications.

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