Before discussing tax accounting and financial accounting, it is important to understand that the government is a substantially different user of accounting from the rest. It is not interested in accounting information out of mere curiosity, but rather to calculate the tax on the profit that companies must pay it. It is therefore logical that the various national governments should establish their own rules on how profit is calculated. It is also logical that, in all those transactions where the accounting treatment is doubtful or open to opinion, the government has a more clearly defined rule — or even one that is less accommodating than the generally accepted standard might be.

There may well be a difference between purely financial accounting — that is, the kind whose fundamental objective is to provide information for business decision-making — and tax accounting, whose objective is to calculate the company’s tax liability to the state. This difference is not due to any concealment or dishonest practices on the part of the company, but rather to differences of criterion between the various users of accounting, perfectly explainable by the different points of view they adopt.

Differences between tax accounting and financial accounting

1. One of the differences can be seen from the point of view of their impact on companies. Whereas financial accounting seeks to track the commercial transactions that take place within the company, tax accounting allows small businesses to keep a closer eye on their cash position.
2. Another difference is based on purpose. Whereas financial accounting gathers financial information relating to the company and its clients in order to help them in decision-making, the objective of tax accounting, for its part, is to finance public expenditure, for which it uses certain tax measures that aim to improve economic decision-making.
3. Finally, we can assess the difference between tax accounting and financial accounting according to their working process. Financial accounting is based on accounting principles that depend on the company’s regulatory and reporting requirements. By contrast, tax accounting may be carried out by a company on its own or with the help of an accountant.