ACCOUNTING PROFIT AND TAXABLE PROFIT- ALL YOU NEED TO KNOW

Public or Private Corporates or organizations are running businesses to earn or maximize profits. Higher profitability show business success, positive sustainability, and better market share. Business enterprises always try to find opportunities that offer more revenues or profits by implementing effective strategies.

But high profit also means they need to pay higher taxes that will eventually decrease the profit shares. The Revenue Boards of almost all countries understand this fact and built in the reporting system that allows the organizations to report their earnings in two comprehensive ways i.e. Accounting Profit and Taxable Profit.

Accounting profit

Accounting Profit also termed as bookkeeping profit or financial profit is actual net income which is incurred after subtracting all explicit i.e. operating & non-operating costs from the total revenue.

It shows how much money is being left with the organization after paying all costs or dues such as wages, rent, transportation cost, sales & marketing costs, manufacturing costs, raw materials cost, interests, taxes, depreciation, etc.

Accounting profit shows actual earnings that are calculated as per defined accounting principles & standards or GAAP.

It reflects the performance and profitability status of the business organization. It also confirms whether decisions are taken and the strategies implemented resulted in success or not.

Accounting profit helps to predict the future growth of the organization. This also helps to understand the financial health of the business in terms of liquidity and solvency.

Taxable profit

Amount (profit) taxable is according to income tax act, 1961 under head profits and gains.

Every year returns are furnished to the income tax department of previous years. Taxable profit and tax thereof is calculated based on returns furnished.

Also, The amount of profit which is taxable as per the Income Tax Act, 1961 under the head Profit and Gains from Business or Profession, is known as taxable profit. It is derived by taking accounting profit as a base. Every year the return is furnished to the income tax department for the previous year in the assessment year. On the basis of this return the taxable profit and the tax thereof is calculated which is to be paid by the company. In this profit, disallowed expenses are added back.

Key Differences Between Accounting Profit and Taxable Profit

The difference between accounting profit and taxable profit can be drawn clearly on the following grounds:

1. Specific revenue and expense items may not be recognized for accounting purposes but recognized for tax purposes. Alternatively, they may be recognized for accounting purposes but not recognized for tax purposes
2. The return is furnished to the relevant department in case of taxable profit while accounting profit is publicly at the end of the financial year.
3. Accounting profit is used for the purpose of knowing company’s profitability in the specified period while the Taxable profit is used for the purpose of identifying the tax payable by the company.
4. The tax losses of previous years may be used to reduce the taxable income in later years, subject to tax rules. This will result in differences between the accounting and taxable income (tax loss carryforward)