📄 1. Tax Return
✅ What It Is:
A tax return is a document filed with the government (e.g., IRS in the U.S.) to report:
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Income
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Deductions
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Taxable income
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Taxes owed or refunded
📊 Prepared Using Tax Rules:
Tax returns are based on tax laws (not accounting standards), which can:
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Allow accelerated depreciation
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Permit tax credits
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Exclude certain revenues or expenses
Purpose: To determine how much tax a company or individual owes.
📘 2. Accounting Return (Book Return)
✅ What It Is:
The accounting return refers to the net income (profit) shown in the company’s financial statements, typically calculated using GAAP or IFRS standards.
Common metrics include:
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Net income (from the income statement)
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Return on Assets (ROA) = Net Income / Total Assets
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Return on Equity (ROE) = Net Income / Shareholder Equity
Purpose: To provide investors and stakeholders with an accurate picture of profitability.
🔍 Key Differences
| Feature | Tax Return | Accounting Return |
|---|---|---|
| Rules | Based on tax code (e.g., IRS, local law) | Based on accounting standards (GAAP/IFRS) |
| Goal | Minimize tax liability | Accurately reflect performance |
| Depreciation | May use accelerated methods | Often uses straight-line |
| Audience | Tax authorities | Investors, creditors, analysts |
| Income | Taxable income | Net income |
⚖️ Why It Matters in Financial Analysis
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Companies often show lower income on tax returns to reduce taxes.
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But they report higher income in financial statements to impress investors.
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Deferred tax liabilities can arise when there’s a difference between tax and book depreciation or revenue recognition.
