Accounting methods that focus on taxes rather than the appearance of public financial statements. Tax accounting is governed by the Internal Revenue Code which dictates the specific rules that companies and individuals must follow when preparing their tax returns. Tax principles often differ from Generally Accepted Accounting Principles.

Balance sheet items can be accounted for differently when preparing financial statements and tax payables. For example, companies can prepare their financial statements implementing the first-in-first-out (FIFO) method to record their inventory for financial purposes, yet they can implement the last-in-first-out (LIFO) approach for tax purposes. The latter procedure reduces the current year's taxes payable.

Refine Your Financial Vocabulary
Gain the Financial Knowledge You Need to Succeed. Investopedia’s FREE Term of the Day helps you gain a better understanding of all things financial with technical and easy-to-understand explanations. Click here to begin developing your financial language with this daily newsletter.