Tax Accruals – Introduction
Income reported on a financial statement before the deduction for income taxes is known as pretax accounting income, and this amount can differ materially from taxable income for an accounting period. Such a difference occurs because accounting income is determined in accordance with generally accepted accounting principles while taxable income is determined by Congressional legislation. It is also logical that such a difference exists because the objectives of financial accounting and those of the Internal Revenue code differ significantly.
The basic objective of financial accounting is to provide information to external users for decision-making purposes. The objectives of the income tax laws, on the other hand, include the procurement of revenue to operate the federal government and the regulation of fiscal policy. Therefore, whenever a tax expense is required to be shown on a financial statement, the question arises:
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Do I show the amount I actually owe the taxing authority or do I show some other amount that more clearly matches the income being reported on the income statement? |
This is where the process of tax accruals begins.
