Accounting is designed to measure, record and report, generally in monetary terms. It’s an information system that keeps track of the resources flowing in and out of an entity, and resources owned, owed, and interests of the owner(s) of that entity.
There are three common types of entities which accounting deals with, and they are: sole proprietorship, partnership, and corporation. These entities are either dealing with businesses, governmental units, and other not-for-profit organizations such as: churches, sports associations, political, social and professional organizations.
What is Taxation?
Taxation is used by our taxing authority to generate revenues from taxpayers. These income and wealth are then allocated, redistributed among taxpayers based on their economic resources and needs. Its purpose is to keep the economy in order and provide funds to other governmental units.
Generally, Income taxes come from: tax levied on consumption of product (sales tax), use of facilities, (user tax), existence of certain individuals and groups (head tax), increased in value of goods & services (value added tax), imports & exports of some goods and services (tariffs), ownership of goods (property tax), transfer of property from one owner to another, and tax on income of certain entities (income tax).
We are going to concentrate more on taxation of certain entities. These three common types of taxpayers are individuals, corporations and fiduciaries (trusts and estates).
How does accounting and taxation affect us?
Accounting and Taxation affect the above-mentioned taxpayers depending on the type of entities that they have. Accounting is used in taxation as an information system, generally reported and presented by financial statements, like an income statement, balance sheet and statement of retained earnings.
Sole proprietor will be taxed as an individual for his/her earnings. Since partnership is not subject to income taxes, but file a partnership tax return (US - for information only) and Business statement of Activities schedule(Canada - same as for individuals).
A partner is only liable for the distributed income from the partnerships, as a pass-thru item. Any guaranteed payments to partners, deducted by the partnerships are taxable to partners, and must be included in the partners` Individual income tax returns.
A corporation is taxed separately from its owners (shareholders) and has to file an income tax return for the corporation itself. The dividends distributed to shareholders are taxed to them when they file their Individuals income tax returns.
Fiduciaries are taxed as separate entities. Distributions made by trusts and estates are deductible by these entities and income to the recipients, double taxation is avoided. Unlike sole proprietorship, partnership, and corporation, trusts and estates use fiduciary accounting. It is more on the classification of all receipts and disbursements, either the principal (corpus) amount or income resulted from the corpus. However the rules of accounting are generally the same applied as to the principal and income of the fiduciaries, that is, the Generally Accepted Accounting Principles (GAAP) applicable in Canada or the US, or other countries.
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