ACA 1 Task 1

Part B: Write a brief discussion (suggested length of 1 paragraph) commenting on the need for reconciling book income for a partnership to taxable income for that partnership for tax purposes.

The methods used to account for business transactions are held to different guiding principles and regulations for financial (book) accounting and tax accounting. Financial accounting is guided by the Generally Accepted Accounting Principles and uses accrual basis accounting for reconciling book income. For Tax accounting the IRS laws and regulations guide accountants to use a modified accrual or cash basis for reconciling taxable income. Discrepancies occur when using two different guiding principles, thus the need for two separate books. There will be some instances where GAAP considers an expense/interest to be taxable income however that may not be the case for under the IRS guidelines creating a discrepancy in the dollar amount of taxable income. Another example of the importance for reconciling is how bad debt is accounted for, if you are using the GAAP and accounting under the accrual basis and have previous claimed debt as previous income you can now claim a bad debt deduction, in the cash basis you would lose the privilege to claim the bad debt deduction because the amount was never collected and there for never reported as income. This brief description of the differences in financial and tax accounting for income demonstrated the necessity to reconcile book to tax income so that there is not a discrepancy on the financial statements between book income and taxable