Linkage of Tax Laws and Accounting Principles Requirements

Taxation laws are oftentimes in conflict with reporting in accounting. There are temporary and permanent differences between tax reporting and financial reporting which results to discrepancy in the amount of financial accounting income and taxable income.

For example, the gain on life insurance and unrealized gain on trading securities are included in financial accounting reporting but not included in tax reporting because such items are exempt from taxation under tax laws.

Another example, some expenses like allowance provision for uncollectible accounts, product warranty and representation expenses are limited or not allowed in the preparation of income tax returns but are recognized in the preparation of financial statements.

Another important matter to consider is the historical development in 1994, the Committee on Accounting Procedure issued A.R.B. No. 23 stating that the amount of income tax expense for the year shown in the income statement many not be the amount currently payable for income taxes.

Therefore, when preparing ITRs, the tax laws must be observed while when preparing reports for financial accounting purposes, applicable accounting and reporting standards must be applied.

Consequently, preparers of financial reports usually make a reconciliation of tax and accounting reports.