A distinct method of recording business transactions keeping tax intent in hub is called as ‘Tax Accounting’ and is regulated by the Internal Revenue Code. It allows businesses to have different financial statements for complying with tax authorities and diverse one, may be, to reveal publically (prepared in accordance with Generally Accepted Accounting Policies)

For instance, for stakeholders’ (other than tax authorities) consideration businesses can maintain financial records based on the First-In-First-Out (FIFO) method of inventory management. At the same time they can switch the same to Last-In-Last-Out (LIFO) method in order to reduce the tax liability of current year.

Though it may not demonstrate fair value of assets and liabilities and true financial position as a result, the reasons that make Tax Accounting more preferred than GAAP is its ease, at the same time, tax accounting is straight forward which curbs time and effort.

There are two key mechanisms permissible under Internal Revenue Code. They are;

• Cash Method: Incomes are recorded on receipts and that of deductions claims on payments.

• Accrual Basis: Incomes are recorded on earnings and the claims for deductions are made when costs incurred and physical exchange of money doesn’t matter.

A company, if entitled, can use either of Cash or Accrual Method or combination of both the methods cited above. Each of these methods has its pros and cons. Though companies can (should) adopt one with maximum benefits and minimum shortcomings, they simply cannot change the method of tax accounting every now and then. The change, so mentioned, can only be done if a company is using desired tax accounting method since last two years and requires to obtain due consent of Secretary of Treasury.

Any such modification should be advocated by professional accountant. Changing tax accounting method is followed by high due diligence and requires great care to be taken, because it may have some negative consequences as well.

This can be concluded as; execution of Tax Accounting requires knowledge of Internal Revenue Code. Though it can be applied by internal expertise, getting assistance from Certified Public Accountant (CPA) is highly suggested to avoid potential hassles.