Tax and accounting are closely intertwined, and tax accounting plays a vital role in a business’s financial management. However, it often comes with numerous challenges. Businesses face complexities leading to significant errors, increasing the risk of compliance issues, audits, and financial penalties.
Tiyak na hindi mo gustong mangyari iyon sa iyong negosyo.
These challenges often stem from constantly evolving tax regulations, inconsistent record-keeping, and the complexity of managing various tax types, potentially affecting a business’s financial stability and reputation.
This is where accounting software becomes an essential solution. It automates tax calculations, centralizes financial records, and helps businesses streamline their tax management and minimize errors.
Do you want to know more about tax accounting and how it works for your business? Stick around to find out!
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Key Takeaways
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What is Tax Accounting?
Tax accounting is one of the types of accounting that focuses on managing and preparing financial records according to tax laws and regulations. It involves tracking income, expenses, and other economic activities to determine a business’s tax obligations.
It is rather different from general accounting. Unlike general accounting, which looks at overall financial health, tax accounting ensures accurate tax reporting, proper deductions, and timely tax filings.
Tax accounting helps businesses maintain compliance, minimize tax liabilities through legal deductions, and avoid penalties or audits. Taxes accounting often requires staying updated on changing tax laws and managing different types of taxes, such as income tax, sales tax, and corporate tax.
Tax accounting is done by one of the types of accountants, namely a tax accountant. They’re a professional who prepares and manages tax records, ensures compliance with tax laws, calculates tax liabilities, and helps businesses or individuals file accurate and timely tax returns.
Why Is Tax Accounting Important?
Tax accounting is essential because it ensures businesses comply with tax laws while maintaining accurate financial records. Proper tax accounting helps calculate the correct tax obligations, avoid penalties, and minimize audit risks.
It also supports effective financial planning by providing clear insights into tax liabilities and deductions. By managing taxation accounting processes efficiently, businesses can improve cash flow, reduce errors, and make informed strategic decisions.
How Does Tax Accounting Work?
Tax accounting begins with recording income, expenses, and other transactions that influence taxable income. Tax accountants then determine tax liabilities by applying the correct tax rates and factoring in deductions, credits, and non-deductible expenses.
Once the calculations are finalized, accounting tax ensures accurate and timely tax return filings. It also includes generating financial reports on tax obligations and maintaining organized documentation. Consider these key components when calculating tax:
- Current year liabilities
The taxes and other financial obligations a business owes within the current fiscal year. For tax accounting, this might include income tax payable, sales tax, and other short-term tax liabilities that must be settled within the year. - Future year liabilities
These refer to tax obligations or other financial responsibilities due in the upcoming fiscal years. It can include deferred tax liabilities, amounts a business expects to pay in the future due to temporary differences between accounting and taxable income. - Profit and loss (P&L)
Also known as an income statement, this financial report summarizes a business’s revenues, costs, and expenses over a specific period. Tax accounting is crucial because it helps determine taxable income and the business’s overall financial performance.
Tax Accounting Methods
A business’s tax reporting approach determines how it records income and expenses for tax purposes, based on its size and operational scale. There are two primary tax accounting methods: cash basis and accrual basis. Let’s discuss it one by one.
- Cash basis
In cash-basis accounting, taxable income is recorded when received, and taxable expenses are recorded when paid. This method is generally easier to implement and maintain and provides a clear view of cash flow since it only tracks actual cash transactions.However, a cash basis may not reflect a business’s financial position, as it overlooks unpaid invoices and outstanding expenses. It often results in misaligned reporting, making it more suitable for small businesses and individuals. - Accrual basis
In accrual-based accounting, taxable income is recorded when earned, and taxable expenses are recorded when they’re incurred, regardless of when cash is exchanged.This method matches income and expenses to the period they relate to, giving a more accurate picture of profitability. It also helps businesses plan better by accounting for all obligations and expected income.However, the accrual basis method is more complex and requires careful record-keeping. It may misrepresent cash flow since it doesn’t reflect immediate cash availability, making it ideal for larger businesses and those with credit transactions.
How are Taxes Calculated for Businesses?
Business taxes are calculated by determining the company’s taxable income and applying the appropriate tax rates while considering deductions, credits, and other tax adjustments. Below are the few steps a tax accountant might take while calculating taxes.
- Calculate profits
Firstly, you need to calculate the total profits. Profits give a clear picture of financial performance and form the foundation for determining taxable income. Profits are calculated by subtracting total expenses from total revenue. - Calculate taxable income
Secondly, calculate the taxable income. Taxable income is the portion of profits subject to taxation, adjusted according to tax rules and allowable deductions. It involves adding non-deductible expenses, subtracting permissible deductions, and factoring in tax credits. - Value inventory
Thirdly, calculate the value of the inventory. Proper inventory valuation affects the cost of goods sold (COGS), directly impacting profits and taxable income. Accurate inventory reporting ensures that tax calculations reflect true business performance.
Calculating taxes for a business can be challenging, especially for companies facing common accounting problems like managing multiple types of taxes. That’s why you need accounting software to simplify it. Download our pricing scheme to see how we can support your business needs.
Tax Accounting Principles vs. Financial Accounting
While tax and financial accounting deal with a business’s financial information, they serve different purposes and follow distinct rules. Let’s take a closer look at how tax accounting principles differ from financial accounting standards.
| Main Areas of Difference | Tax Accounting | Financial Accounting | |
| Purpose
Regulations & Standards Income Recognition Expense Deductions Reporting Requirements Asset Valuation |
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It provides stakeholders with a clear picture of a company’s financial health.
It adheres to accounting standards such as GAAP (US), IFRS (international), or Philippine Financial Reporting Standards (PFRS). Recognizes income when it’s earned, following accrual-based accounting principles. Records all business-related expenses, whether they are tax-deductible or not. It produces financial statements like income statements, balance sheets, and cash flow reports. It follows standardized methods for consistent financial reporting. |
Tax Accounting for Individuals
For individual taxpayers, tax accounting solely focuses on managing personal income, expenses, and deductions to ensure accurate tax reporting and compliance with government regulations.
It involves calculating taxable income from various sources, such as salaries, investments, rental properties, and other transactions that affect the individual tax burden, while considering applicable tax credits and deductions.
Proper tax accounting helps individuals file timely and accurate tax returns, avoid penalties, and potentially reduce liabilities. While it is possible to use a tax accountant’s service to manage and count your taxes, it is not a legal requirement.
Tax Accounting for Businesses
In the business setting, accounting tax involves tracking and managing a company’s financial transactions to ensure compliance with tax laws and accurate reporting. It includes calculating taxable income, applying the correct tax rates, and preparing necessary tax filings.
Effective tax accounting helps businesses minimize tax liabilities, avoid penalties, and maintain organized financial records for audits and future planning. Due to the complexity of the process, it is not necessary to use a tax accountant’s service to manage and count your company’s taxes, but it is common in larger organizations.
Tax Accounting for Tax-Exempt Organizations
Tax-exempt organizations, such as charities and nonprofits, must also file taxes. This process ensures compliance with specific tax regulations while maintaining their exempt status. These organizations must track incoming funds, donations, grants, and expenses, and how they are used for their stated mission.
Even though they don’t pay income tax, they may still need to file annual information returns and comply with rules on employment taxes and unrelated business income. Proper tax accounting helps them avoid penalties and retain their tax-exempt status.
Taxes Businesses Need to Settle in the Philippines
If your business is in the Philippines or considering opening a business there, consider these types of taxes. Paying these taxes is required to stay compliant with government regulations.
- Income tax
Income tax is a mandatory levy on net taxable income after deductions. In the Philippines, it’s filed via BIR Form 1700, with a 25% rate for domestic corporations and varying rates for sole proprietorships and partnerships. - Value-Added Tax (VAT)
Value-added tax (VAT) is an indirect tax on selling goods, services, and imports in the Philippines. Businesses with annual sales over ₱3 million must register for VAT, apply a 12% rate, and file returns regularly to remain compliant. - Capital Gains Tax (CGT)
Capital Gains Tax (CGT) is a tax on profits from selling capital assets like property, stocks, or bonds. In the Philippines, CGT is 6% of the gross selling price or fair market value, whichever is higher, and must be filed via BIR Form 1707 within 30 days of the sale. - Excise tax
Excise tax in the Philippines applies to specific goods like fuel, alcohol, and tobacco, based on quantity (specific tax) or value (ad valorem tax). Some services, like airline tickets, may also be taxed. - Withholding tax on compensation
Withholding tax on compensation is the portion of an employee’s salary deducted by businesses and remitted to the BIR as a tax credit. Rates vary by income bracket, and businesses must file monthly and annual reports. - Percentage tax
Percentage tax in the Philippines is a sales tax on gross earnings, filed via BIR Form 2551Q. It applies to businesses with annual sales of ₱3 million or less, with rates from 1% to 3%, depending on business type.
Automates Tax Processing with HashMicro Accounting Software
One of the accounting software that can help you manage your taxes is HashMicro. With its advanced and comprehensive system, HashMicro helps businesses track, manage, analyze, and calculate tax data efficiently and automatically. HashMicro offers a free demo for you to try.
HashMicro Accounting Software offers robust features to optimize your financial taxation process, from tracking to analyzing. Some of the comprehensive features are:
- A financial dashboard provides a clear overview of your business’s tax-related financial data, including taxable income, cash balances, accounts receivable, accounts payable, and more.
- Cash flow forecasting predicts your future tax obligations by generating accurate forecasts of your income and expenses over a specific period.
- Fast bank reconciliation ensures accurate tax reporting by automatically and securely importing bank transactions, keeping your financial records current.
- Accrual & amortization reduces the risk of tax errors with automated recording and calculation of accruals and amortizations.
- The E-invoicing standard simplifies tax compliance by connecting to the designated e-invoicing network in the Philippines, ensuring standardized and accurate tax invoice exchanges.
- Analytical reporting generates detailed tax-related financial reports, such as income statements, cash flow statements, balance sheets, and tax liability overviews.
Conclusion
Tax accounting is a branch of accounting that focuses on managing and preparing financial records according to tax laws and regulations. It involves tracking income, expenses, and other economic activities that affect taxes.
Understanding accounting tax is essential for your business to minimize compliance issues, audit risks, and financial penalties. You certainly don’t want your business to collapse because you don’t comply with tax regulations.
Implementing reliable accounting software ensures accurate tax calculations and simplifies compliance with tax regulations. HashMicro Accounting Software offers advanced features that integrate financial taxation processes, from managing and calculating multiple tax types to automatically reflecting the latest tax rules.
Book our free demo now to discover how HashMicro can help improve your tax-related financial processes! Palakihin natin ang iyong negosyo sa amin!
Frequently Asked Questions About Tax Accounting
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What is the journal entry for income tax?
You’ll create a journal entry to record income tax expense with a debit to income tax expense and a credit to income tax payable. The income tax expense reflects the amount owed for the current period based on the company’s taxable income.
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How is tax expense accounted for?
Tax expense is calculated by multiplying the applicable tax rate by the taxable income. Other factors, such as tax liabilities, assets, and non-deductible items, should also be considered.
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Does tax accounting follow the cash or accrual method?
Most individuals filing income tax returns use the cash-based method. In contrast, on an accrual basis, taxpayers report income when it is earned or when they become entitled to receive it.
