One Reason That Tax Accounting Rules Differ from Generally Accepted

question 13

Multiple Choice

One reason that tax accounting rules differ from generally accepted accounting principles is that:

• A) Taxpayers often tend to overstate income, and companies tend to understate income when reporting to shareholders.
• B) Taxes are rarely disputed, so there is less need for verifiability in tax rules.
• C) The tax code tries to follow the economic substance of transactions, but generally accepted accounting principles focus on their legal form.
• D) Congress has decided that some actions should not be rewarded by tax deductions, even though they may meet the accounting definition of expenses.

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Definitions:

Adjusting Entries

Adjusting Entries are journal entries made in accounting records at the end of an accounting period to update accounts for accruals and deferrals not recorded during the period.

Real Account

An accounting record that represents assets, liabilities, and owner’s equity, and is not closed at the end of the accounting period but carried over to the next.

Nominal Account

An account related to income, expenses, losses, or gains—these accounts are closed out to the capital account at the end of an accounting period.

Income Summary

An account to which all income statement account balances are transferred at the end of an accounting period to show the period's profit or loss.