Financial Reporting Accounting Vs. Tax Accounting

Financial reporting accounting tracks the funds flowing in and out of a business and studies the relationships between these numbers. Tax reporting accounting uses much of the same information compiled in a company's financial reports to prepare, file and pay a range of state and federal taxes. Tax reporting accounting depends on the figures derived from financial reporting, but financial reporting also provides information that can help a business to refine and improve its operations by showing which areas are earning or losing money.

Payroll accounting involves tracking the hours that employees work, calculating their total earnings based on individual wage or salary levels and deducting payroll taxes and contributions to benefit funds such as retirement and health insurance. Payroll accounting ensures that employees are paid accurately and fairly, and it also allows a business to monitor its payroll expenses relative to its overall earnings. Payroll numbers also provide the basis for payroll tax accounting, which involves withholding and paying a range of taxes to state and federal agencies.

A profit and loss statement calculates a company's net earnings by listing all of its sources of revenue and deductible expenses, such as payroll, rent and materials. Net profit is the amount left over after subtracting expenses from revenue. Profit and loss accounting provides information about whether a company's business model is sound and whether its owners are earning any money. Profit and loss accounting also provides the basis for income tax accounting, because a company's taxable income closely correlates with its profit or loss.

A cash flow projection charts the funds that will likely flow in and out of a business during a designated period, such as a month or a year. These sums include amounts from owner's draws, debt repayment and incoming loans and capital infusions that are not directly related to tax-deductible income and expenses. A cash flow projection helps a company with financial planning, including making sure enough money is on hand to make tax payments. However, the sums listed on a cash flow projection do not directly correlate with the company's tax liability.

The balance sheet is an indispensable financial statement that is used for internal bookkeeping, such as assessing a company's overall financial health and liquidity at a particular moment. It's also presented to a banker or other lender when applying for a loan. A balance sheet has no relevance to tax reporting, although the information it contains may reflect your company's capacity to pay the taxes it owes. Balance sheets include sections listing all of a company's tangible and intangible assets, as well as sections listing liabilities, such as debts and accounts payable.