Unifying Financial and Tax Accounts

A fair portion of newly-established companies outsource their bookkeeping out of cost considerations. If they adopt incorrect tax savings plans, such companies are likely to end up making tax declarations that differ from their actual operating results, a situation locally known as having "two sets of accounts" (financial accounts and tax accounts). However, when a company is operating successfully and business is booming, it may find that having two sets of accounts is self-defeating, yielding more financial and tax woes by the day: It will be taken to task at every turn and management may not know where to begin dealing with this dilemma.

Unless a company is a small outfit – a proprietor's do-it-yourself operation, say – a basic internal control system will be needed to achieve effective controls, but when a company has two sets of accounts, it is nearly impossible to institute an effective internal control system. If, for example, a portion of income is not entered in the tax accounts and as a result shipping orders or invoice documents cannot be issued consecutively, and if bank financing difficulties arise because the company's external accounts (tax accounts) do not yet fully reflect actual operating conditions, then there is a risk of a backlash from employees if they do not get paid on time.

Common causes of divergent accounts:

• Company funds being used by a majority (or at least a major) shareholder for personal investments in mainland China or elsewhere overseas;
• Financial accounts being recorded jointly under the group (multiple companies) concept, or because there has been no financial separation between the company and its majority shareholder;
• Lack of an inventory cost settlement system;
• Making entries in the accounts based on whether or not tax receipts are obtained;
• Sales that are subject to customer-end demand, so that invoices cannot be issued in full; and
• Outsourcing bookkeeping when, due to the growing scale and complexity of the company and its business, non-professional external bookkeepers are unable to enter full and accurate records.

• Have company personnel make bookkeeping entries themselves.
  
  As a company grows in scale, the first step in bookkeeping consolidation is to go from outsourcing bookkeeping to having company accounting personnel enter records themselves. This will facilitate reconciliation and the individual recording of actual transaction circumstances.

• Analyze discrepancies between the two sets of accounts and identify the main reasons for the differences.
  
  Fix a benchmark date to calculate and analyze discrepancies between financial accounts and tax accounts. Before comparing differences, make sure that the original entry methods for both sets of accounts have fully recorded all transactions prior to the benchmark date, then after discussing the company's business model and internal account (i.e., the financial account) bookkeeping methods with financial bookkeeping personnel and personnel familiar with the company's organizational structure and business, look for possible causes of divergent accounts. Based on the possible causes found, perform a reasonability analysis and confirmation of the discrepancies already calculated.

• Rectify actual quantities and money values of different assets and liabilities.
  
  For the legal entities of a company to consolidate their accounts, they must verify the actual amounts and values of assets and liabilities. This requires looking at the assets and liabilities from a legal standpoint and entering in the accounts only those that belong to the company. Also, stocktaking must be performed for physical assets (like inventory and fixed assets) for the sake of verification. In the rectification process, assets and liabilities that do not properly belong to the company must be separately tabulated.

• Deal with large discrepancies.
  
  Where there are large differences between (a) the tax accounts, (b) rectified figures for actual assets/liabilities in step 3 above, and (c) backlogged assets/liabilities that the company needs or plans to enter to update the accounts, it is necessary to make legally suitable adjustments, centered around the tax accounts, such as account updating, asset purchase/scrapping and increases/decreases of capital.

• Solve problems.
  
  Apart from mistaken tax savings concepts on the part of majority shareholders, most of the reasons for having two different sets of accounts are to be found in corporate managers' inability to solve problems through their own experience or expertise, leading to problems like unapproved investment in mainland China or failure to establish a cost settlement system. At that point, only reliance on the assistance of outside professionals can prevent problems from recurring after accounts are integrated.