Final answer:
Companies maintain two sets of accounting records because they generally use different depreciation methods for financial reporting and for tax purposes, one in accordance with GAAP and the other in accordance with the IRC.
Step-by-step explanation:
Most companies use one method of depreciation for financial reporting and a different method for income taxes. This practice is often in accordance with Generally Accepted Accounting Principles (GAAP) for financial reporting and the Internal Revenue Code (IRC) for tax purposes. The use of two methods requires companies to maintain two sets of accounting records: one for book purposes (financial reporting) and another for tax purposes.
For financial reporting, companies often use the straight-line method of depreciation, which allocates the cost of an asset evenly over its useful life. However, for tax purposes, companies might use an accelerated depreciation method, such as Modified Accelerated Cost Recovery System (MACRS), which allows for greater depreciation expenses in the earlier years of an asset's life. This difference is aimed at minimizing taxable income in the early years and deferring tax payments.
The rationale behind maintaining two sets of records is to comply with the different objectives of financial and tax reporting. Financial reporting aims to present a fair view of a company’s financial position and performance to its stakeholders, while tax reporting focuses on adhering to tax regulations to compute tax liabilities accurately.