Variance Analysis Of Accounting Profit And Taxable Income Under The New Accounting System

Accounting and taxation are closely related to each other and cannot be separated. The different purposes and principles of accounting and taxation lead to the ineluctable differences between the accounting income, which is based on the accounting standards and the accounting system, and the taxable income, which is based on the tax laws. The purpose of accounting is to represent the financial position, the operating results and the cash flows of a business faithfully and reliably, so that the users' needs for accounting information can be met; while the purpose of the tax laws is to guarantee the nation's tax benefits, and to solve the problem of how to distribute wealth between the government and its taxpayers. The principles of accounting (including objectivity, substance over form, relevance, consistency, comparability, timeliness, understandability, accrual basis, matching, historical cost, determination of revenue charge and capital expenditure, prudence and materiality) and of deduction before taxes (including accrual basis, matching, relevance, certainty and reasonableness) are alike in some aspects, and are not in some others. The solution for the differences is tax adjustments. Accounting of a business must observe the rules of the accounting system, and tax adjustments are made according, to the tax laws when income taxes are calculated.In order to change the rigidity of accounting policies, the incomparability of accounting information and the inflexibility of accounting system, on December 29, 2000, the Ministry of Finance issued the Accounting System for Business Enterprises, which has great significance on standardizing the accounting treatments and improving the quality of accounting information. This has also extended the differences between accounting and the tax laws, and has increased the difficulties of tax adjustments. The differences between the accounting income and the taxable income are compared and analyzed here respectively on the recognition of revenues, costs and expenses, losses of assets, non-operating expenditures, investments and contingent losses under the new accounting system, then ways of tax adjustments are given, in order to improve taxstaffs' ability in tax administration and tax inspection, and help taxpayers follow the tax laws correctly, fulfill their tax obligations and decrease tax risks.