Every practice owner should understand the different functions and purposes of tax accounting and managerial accounting. Tax accounting provides financial information for external entities such as lenders and government agencies. Managerial accounting supports internal business management. The practice doesn’t keep two sets of books. Instead, how the numbers are presented depends on the intended user and purpose.
Highly trained tax accountants work on a company’s behalf to ensure compliance with rules and regulations. They make sure the business adheres to tax laws, pays taxes at the appropriate time, and takes advantage of all legal deductions and credits. These professionals guide companies through the intricate tax code landscape and find ways to minimize financial liability. The objective is to report the lowest possible profit so that the business and its owners owe the least tax possible.
Various Responsibilities
A tax accountant is in charge of:
- Revenue recognition: Track billable hours and client payments.
- Expense management: Identify all tax-deductible expenses, such as office supplies, professional memberships, customer entertainment and travel.
- Depreciation: Calculate reductions in the value of office equipment and furniture.
- Tax credits: Identify applicable credits, like those for energy-efficient improvements and employing military veterans.
- Quarterly payments: Make accurate estimated tax payments.
- Year-end documents: Prepare and file federal, state and local returns.
Managerial accounting, in contrast, is concerned with profit and loss statements, balance sheets and cash flow statements. It is inwardly focused, equipping practice owners and managers with the information they need to make sound business decisions. Managerial accounting can involve analyzing costs, creating budgets, identifying the most profitable products and services, and flagging issues impacting profits. The reports are instrumental in guiding strategy and day-to-day operations.
Looking Within
Let’s explore an example. Suppose the practice owners are considering offering in-house ultrasonography. A tax accountant will examine the equipment costs and facility improvements and then estimate the revenue increase and tax impact. Meanwhile, a managerial accountant will focus on:
- Budget: Determine the cost of the equipment, doctor and staff training, ongoing expenses, and expected revenue.
- Break-even analysis: Ascertain how many cases the practice would need to see to cover the new cost.
- Profitability analysis: Compare potential revenue against the cost.
- Metrics: Establish key performance indicators such as client acceptance rates, equipment utilization and reduced outsourcing expenses.
- Cost-benefit analysis: Compare the costs against revenue estimates, improved diagnostic capabilities and market differentiation.
Similarities
The critical thing to remember about tax and managerial accounting is that each uses numbers from the same source, though the business might report the data somewhat differently. For example, in the case of tax accounting, the tax return numbers might not match those on the company’s books after the accountant makes closing entries, such as moving expense figures to different categories and calculating year-end depreciation, amortization and credits. When a managerial accountant enters those adjustments in your QuickBooks or Xero file, the books match the tax return.
Why is that step important? First, if you switch to a different CPA, the new one needs to see those adjustments to make sense of your numbers. Also, when you have the practice appraised for a partial or total sale, the valuator wants to reconcile the tax return with the books. When they don’t match, the valuator must investigate the differences and likely will charge you more.
Key Differences
Let’s focus for a minute on the treatment of expenses and payroll. Tax accounting groups many expenses and reports only the totals. In some cases, the cost of goods sold is a single amount on the tax return. In managerial accounting, COGS is broken into several subaccounts on the profit and loss statement — for example, pharmaceuticals, in-house and reference lab costs, and vaccines. This way, practice leaders can easily track specific areas to ensure proper pricing and inventory management.
Payroll expense is another instance in which the tax return combines numbers. In this case, two lump sums are shown: the owner’s pay and what all other employees received. Internal financial statements should go further and separate the compensation paid to owners and veterinarians from the salaries and wages of everyone else. Categories for managers, veterinary nurses and client care staff might be helpful, particularly at large practices.
In a nutshell, tax accounting and managerial accounting are equally important, but each caters to different audiences and their specific needs.
A NUMBERS GUY
Every accountant interested in history should recognize the name Luca Pacioli. Recognized as the father of modern accounting, Pacioli was an Italian mathematician and Franciscan friar who developed the double-entry bookkeeping system in the late 1400s.