The Difference Between Tax and Management Accounting

Have you heard of the terms “management accounting” and “tax accounting” and wondered what they were and how they differ? 

Keep reading to understand tax and management accounting, the differences, and when you’ll need a tax or management accountant.

What is Tax Accounting?

Tax accounting entails the rules for generating tax assets and liabilities in an individual’s or business’s accounting records. Tax accounting isn’t derived from accounting frameworks such as IFRS or GAAP but from the Internal Revenue Code (IRC).

Tax accounting generates taxable income, unlike business income reported on the entity’s income statement. 

The Basic Elements of Tax Accounting

Tax accounting recognizes two key aspects:

• Current year: Recognizing a tax asset or liability based on estimated payable or refundable income taxes relating to the current year. 

• Future years: Recognizing deferred tax assets or liability based on estimated effects of temporary differences and carryforwards in the coming years. 

Where Tax Accounting Applies

All entities must engage in tax accounting, including individuals, partnerships, sole proprietorships, etc. Also, nonprofit organizations must file annual returns for the IRS or CRA to determine whether they comply with the tax-exempt rules.

What is Management Accounting?

Management accounting, also known as managerial accounting, is a process that offers financial information and resources to managers, which they use in decision-making. Management accounting is only valuable for an organization’s internal team, making it different from financial accounting. 

This type of accounting is helpful because the management uses the data to make accurate and better business decisions. 

The Basic Elements of Management Accounting

Management accounting involves various accounting aspects. Its primary aim is to improve information quality concerning business operation metrics.

The different aspects of management accounting include:

• Forecasting, trend analysis

• Budgeting

• Management of accounts receivable

• Metrics surrounding financial leverage

• Analysis of inventory turnover

• Constraint analysis

• Analysis of cash flow

• Costing and valuation of products

Functions of Management Accounting

The functions of management accounting include the following:

Decision Making

Proper education on the financial health of an organization ensures that the management makes more informed decisions. After all, managerial decisions play a crucial role in shaping the future of an organization.

Planning

Management accounting helps avail information and data necessary for creating short and long-term projections and managing corporate operations. 

Coordinating

Management accounting avails necessary coordination tools like financial analysis and interpretation, financial reporting, budgeting, etc. It helps the management reconcile costs and financial records, establish standard costs, prepare budgets, and analyze cost deviations to enable management decisions. 

Analysis and Interpretation of Financial Data

A management accountant analyzes data and presents it before the organization’s management in an understandable manner. The organization’s management then uses this information to make informed decisions.

Where Management Accounting Applies

Management accounting presents accounting data in a way that helps day-to-day organizational operations and policy development. It focuses on a company’s revenues and expenditures, plus asset utilization. 

Differences Between Tax Accounting and Management Accounting

Tax accounting and management accounting are two separate areas in the accounting field. While there are shared similarities, there are critical differences between the two:

1. Focus

Tax accounting primarily focuses on the application of taxation laws and regulations. Tax accountants prepare tax returns, ensure compliance with tax laws, and optimize tax strategies to reduce tax liabilities for organizations or individuals.

On the other hand, management accounting offers financial information and analysis to an organization’s internal users. It aids the management in planning and control operations, making informed decisions, and evaluating performance. Its primary objective is to assist in effective organizational leadership. 

2. Purpose

Tax accounting ensures compliance with taxation laws and regulations. It focuses on accurately calculating and reporting owed taxes to government authorities. It also uses available credit, exemptions, and deductions while meeting legal requirements.

Management accounting offers information and analysis for internal organizational decision-making. It focuses on generating different reports like performance evaluations, cost analyses, forecasts, and budgets. This assists an organization’s management in planning and improving its performance.

3. Audience

Tax accounting focuses on external stakeholders like the IRS (Internal Revenue Service) in the United States, or CRA (Canada Revenue Agency) in Canada. Its primary audience is the state agencies mandated to assess and collect taxes. 

Management accounting is an organization’s internal affair. It includes the stakeholders, executives, and managers who need the financial information to plan, make decisions, and for performance evaluations. 

4. Timeframe

Tax accounting focuses on historical data. The calculation of taxes happens based on financial transactions and activities from a specific tax year in the past.  

Management accounting revolves around both historical and future analysis. It encompasses the preparation of forecasts, budgets, and financial statements, to offer insights into the organization’s past performance and expectations for the future. 

5. Skill Set and Expertise

Tax accounting demands an in-depth knowledge of taxation laws and regulations and a deeper understanding of tax planning and compliance. Tax accountants must remain updated on the changing dynamics in tax processes and legislation and have top-notch attention to detail. 

Management accountants, on the other hand, have a broad understanding of performance evaluation, strategic planning, budgeting, cost accounting, and financial analysis. Management accounting requires strong communication and analytical skills to support an organization's decision-making. 

When Do You Need the Services of a Tax Accountant and Management Accountant?

You’ll need the services of a tax accountant to help you throughout the year to stay on top of all tax requirements and makes things run smooth as you approach the date for filing annual returns. 

The management accountant assists with a range of financial demands within an organization. They help dissect the financial implications of business strategy, decisions, and arrangements. 

Summary

Tax accounting and management accounting are key branches of accounting that differ in their required skills, timeframe of use, audience, purpose, and focus. The main focus of tax accounting is tax compliance and optimization of tax strategies for government agencies. 

Management accounting primarily focuses on performance evaluation and internal decision-making.

At Bottcher, our business support services include tax and management accounting services. 

Book a complimentary consultation today, and we'll tailor-make an ideal package suitable for your business.