The main objectives of financial accounting are as follows:
- Providing Financial Statements: Financial accounting involves preparing financial statements such as income statements, balance sheets, and others. These statements are used to convey essential information about the financial position and results of the company’s operations.
- Recording Financial Transactions: Financial accounting is responsible for recording all financial transactions and events related to the enterprise. This includes revenues, expenses, assets, liabilities, and capital.
- Assessing Current Financial Position: Financial accounting helps evaluate the current financial condition of companies. This assessment is essential for managers, investors, creditors, and other interested parties.
- Comparative Analysis: Through financial accounting, companies can monitor their financial performance and compare it to that of their competitors. It also allows them to track financial changes within their organization, enabling assessments of performance and competitiveness.
- Compliance with Standards: Financial accounting follows specific accounting standards and rules mandated by regulatory authorities and legislation. These standards and rules aim to ensure consistency and transparency in financial reporting.
Financial accounting is crucial for companies as it provides information necessary for making strategic decisions, attracting investments, and fulfilling tax obligations. It serves as a primary means for controlling and reporting on financial results and the structure of a company’s assets and liabilities.
Tax accounting and financial accounting are two distinct areas within accounting that have different objectives, methods, and requirements.
Starting with their different objectives, tax accounting primarily focuses on managing tax obligations and compliance with tax laws and regulations. Its main emphasis is on calculating and filing tax returns to determine and pay taxes owed by individuals or businesses. In contrast, financial accounting is used to record, classify, and present financial information to both internal and external stakeholders regarding the financial position and results of a company’s operations.
Another difference between the two accounting disciplines is in terms of who uses the information and how. Information from tax accounting is utilized by tax authorities to assess and verify the tax liabilities of taxpayers, ensuring compliance with tax laws. This pertains to the payment of taxes and whether everything is in accordance with tax regulations. On the other hand, information gathered from financial accounting is used by investors, managers, creditors, shareholders, and other interested parties for analyzing financial conditions, making investment decisions, obtaining loans, and strategic planning.
Differences also exist in the standards and rules applied by the two accounting methods. Tax accounting adheres to tax laws and regulations mandated by tax authorities. In contrast, financial accounting follows International Financial Reporting Standards (IFRS) or national accounting standards, which are different from tax laws and rules.
Another significant difference lies in the method of reporting. Tax accounting uses specific tax rules and methods to calculate taxes, which may not always align with the methods used in financial accounting, which follows generally accepted accounting principles (GAAP) and principles of consistency, reliability, and fairness.
The aforementioned differences between tax and financial accounting underscore the distinct objectives and requirements of these two fields, making it important for companies to use them appropriately to comply with tax laws and regulations while providing valuable information to stakeholders regarding the financial status of the company.
The simultaneous use of both tax and financial accounting is crucial for companies because it ensures smoother and more productive development in their business activities. Some of the most important reasons for using both accounting areas simultaneously include the ability for companies to forecast their revenues, expenses, and taxes, which is beneficial for strategic planning and resource management. Furthermore, using both types of accounting helps to reduce the risks of disputes with tax authorities and increases the chances of attracting new investors.