Monday, May 4, 2009

Tax vs. Financial Accounting Differences

What are the main differences between Tax and Financial Accounting?

One of the biggest differences between tax and financial accounting is that they both have results from a treatment that does not reverse over time. For example, the difference remains imbedded in their respective net incomes permanently.

A temporary or timing difference is one that will reverse itself in a later accounting period. This generally occurs over two or more periods. One example is the income or deductions for financial accounting will equal the income or deductions for tax accounting purposes. More examples of timing differences include differences in depreciation schedules, bad debt deductions vs. allowances for bad debt, and prepaid expenses.

Examples of more permanent differences between tax and financial accounting include tax-exempt interest income on municipal bonds, life insurance proceeds, tax credits, and nondeductible fines that are incurred by a company.

1 comment:

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