Accounting is the process of recording, analyzing and reporting financial transactions to stakeholders. But what does taxation have to do with accounting?

Tax accounting, in simple terms, is accounting that complies with the tax laws of a given country. It is necessary to abide by the laws and regulations set by the country in order to avoid being penalized and/or criminalized.

According to the Philippine tax code¹, taxpayers have the freedom to choose what accounting method they would like to use as long as it’s clearly reflecting the income and the financial position of the business.

However, certain tax treatments differ from the accounting treatment. This is mainly due to regulation and tracking purposes.

What’s the difference between accounting and taxation?

Differences between accounting and taxation including, but not limited to the following:

1. Expenses.

Generally, in accounting, as long as the business expense is evidenced by adequate proof, then the entity can claim it as such. But in taxation, rules and limitations have to be followed regarding certain expenses in order for the taxpayer to claim it as a valid expense.

2. Income.

Discrepancies between accounting and taxable income may come from unrealized gains.

In accounting, gains, whether realized or not, must be recorded as revenue. However, for taxation, such gain can only be recognized when realized. This is an example of a temporary difference – wherein the effect of accounting and taxation will equalize over time.

3. Treatment and effect.

In accounting, revenues and expenses are used as data in order for the stakeholders to interpret business transactions. While for taxation, these data are used in order to determine how much to pay the relevant government agency.

All things considered, accounting and taxation go hand in hand when dealing with valued stakeholders and must be taken seriously; otherwise civil or criminal charges may be filed against the violator.

Go back to the main article: An Ultimate Guide to Philippine Tax: Types, Computations, and Filing Procedures

About the Author.

Miguel Dar is a CPA and an experienced tax consultant who specializes in tax audits. He provides tax advice to various start-up enterprises and clarified tax concerns of individual taxpayers. This includes assisting clients in registering their businesses, tax and bookkeeping training for start-up businesses, settling open cases, tax planning for future tax compliance and answering tax-related inquiries. Connect with him on Linkedin.

Reference.

1. National Internal Revenue Code (1997), Section 34