WHAT IS THE DIFFERENCE BETWEEN ACCOUNTING PROFIT AND TAXABLE PROFIT.

 

Accounting profit and taxable profit are two different concepts used in financial reporting and taxation. They represent distinct perspectives on a company's financial performance and are calculated based on different rules and regulations. Here is the difference between the two.

Accounting profit.

Accounting profit refers to the financial gain or profit a company makes according to its accounting principles. It is calculated by deducting all relevant business expenses, including both cash and non-cash expenses, from the total revenue generated during a specific accounting period. The purpose of accounting profit is to provide a comprehensive view of a company's financial performance based on generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS).

The formula for calculating profit is as follows: Accounting =Total Revenue – Total Expenses

Accounting profit includes various non-tax deductible expenses such as depreciation and certain provisions which are allowed for accounting purposes but not for taxation purposes. As a result, accounting profit is generally higher than taxable profit.

Taxable profit.

Taxable profit is the income on which a company's taxes are assessed by the authorities. It is the profit figure that is used to calculate the company's income tax liability. The taxable profit is derived from the accounting profit by making specific adjustments, considering tax laws and regulations.

Taxable profit typically involves applying tax rules and regulations to the accounting profit to arrive at the net income amount that is subjected to taxation. This may involve adding back certain expenses that are deductible for accounting purposes and deducting other expenses or tax credits that are allowed for tax purposes.

The formula for calculating taxable profit is as follows

TAXABLE PROFIT = ACCOUNTING PROFIT + TAXABLE ADDITIONS – TAXABLE DEDUCTIONS

Taxable profit can be lower than accounting profit due to differences in tax law, deductions, credits and other tax-related adjustments.

In summary accounting profit is a financial profit calculated according to accounting principles, while taxable profit is the profit amount used for tax purposes, considering tax laws and regulations. As a result these two measures of profit can differ due to various adjustments made to arrive at taxable profit for taxation purposes.