1. Describe how they are similar and why there are differences.
2. Also, include specific examples of how and when to apply the principles of both types of accounting.
There are several differences between income tax and GAAP accounting. First, the income tax accounting is done for the purpose of calculating the taxable income for a period defined by the income tax law. On the other hand GAAP accounting is used to present the accounts to the stakeholders and inform them of the current financial position of the company. Second, the income tax accounting is in fact not accounting the strict sense; it is the correct filling up of income tax forms for the purpose of complying with the income tax law and calculating the taxable income of the company. In contrast, the US Securities Exchange Commission requires the GAAP accounting and the purpose is to improve the quality of financial information shareholders receive and on which they base their investment decisions. Third, the income tax accounting is required to bring about a parity in which every company calculates its income to pay taxes. In case of GAAP accounting the objective is to make comparison among the financial statements of different companies meaningful and helpful in making investment decision. Fourth, the income tax accounting is required to comply with the requirements of the Internal Revenue Service but the GAAP is required to comply the requirements of the SEC. Fifth, the income tax accounting ...
Income Tax Acct. is discussed in great detail in this solution.