Difference Between Accounting Profit and Taxable Profit (With Table)

Accounting Profit vs Taxable Profit

The key difference between Accounting Profit and Taxable Profit lies in the fact that Accounting profit means when a company’s expenses are less than the company’s revenue through a particular period and taxable profit means where a company has to pay tax on the company’s profit under income tax regulations.

The audit conducted for accounting profit is financial audit while tax audit is conducted for taxable profit.

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 refers to the earnings calculated based on the accounting standards or GAAP (Generally Accepted Accounting Principles) whereas Taxable profit adjusts the accounting profit for tax reporting that allows the organization to reduce their tax liability.

Accounting profit includes every explicit cost that is involved in doing the business.

The difference between sales and the cost of production of goods sold is called Gross profit.

All other expenses are subtracted from the gross profits to derive the Accounting profit.

Explicit operating expenses are utilities, rent paid, depreciation, interest, salaries, amortization and other day-to-day operational costs of running the business.

Taxable profit is derived after considering the tax liabilities.

It considers or includes the accounting profit and certain expenses, and then calculated & updated in profit & loss account.

Accounting profit is sometimes higher than taxable profit as organizations want to reduce the tax liabilities defined within the acceptable tax guidelines.


Parameter of ComparisonAccounting ProfitTaxable Profit
DefinitionAccounting profit is also referred to as bookkeeping profit. It is the net income that comes after subtracting all explicit costs from the organization's total revenue as defined by accounting standards or GAAP. These explicit costs include raw material costs, labor costs, distribution costs, and other production costs or expenses.Taxable profit considers tax liabilities and refers to the profit that is taxable as per income tax guidelines or income tax act. It includes accounting profits and other costs.
Activity TypeOn-going as it continuously considers the payments and receivables.One-time as taxes are calculated once all amount is received and paid.
AimThe main aim is to recognize the business profitability as a whole.The main aim is to derive the tax liability of the business enterprise.
ScopeAccounting profit comes under the scope of financial reporting.Taxable profit or income comes under the scope of Tax reporting.
GuidelinesDefined Accounting standards or GAAPIncome Tax Act
BaseTotal sales & explicit costs.Accounting Profit and other costs.
ConsiderCurrent Financial Year.Income from the previous year is considered.

 

What is 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.

Accounting Profit
Accounting Profit Formula
 

What is Taxable Profit?

Taxable profit is the portion of an organization’s profit that is subject to income taxes as per the tax laws of the specific jurisdiction of the country.

It is used to differentiate between accounting profit and earnings. Taxable profit is used to show the tax liability on income or profit.

Taxable profits take the accounting profits in its accounts as a foundation and calculate tax on that.

This only considers the amount which is received in the books of accounts not which is booked.

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Taxable profit is published in balance sheets of the business as it shows the organization’s payable or recoverable income tax.

It is calculated for the previous year, and disallowed expenses and tax returns are added back. A double-declining depreciation method and LIFO inventory valuation used in Taxable profit.

Taxable Profit
Taxable Profit Formula

Main Differences Between Accounting Profit and Taxable Profit

It is essential to make the distinction between Accounting profit and Taxable profit because it derives the actual net earnings that show the business success status.

  1. Accounting profit is the financial gains after excluding all costs whereas profit on which taxes are imposed is identified as Taxable profit.
  2. Accounting profit runs on accrual-based accounting methods i.e. it shows the accounts receivable once the sale is made while there might not necessarily money is received from the customer. Taxable profits works on cash-based method i.e. it records the cash or money when it is exchanged or received from the customer to the business, not just on booking.
  3. Accounting profits consider the straight-line method for calculating the depreciation whereas Taxable profit considers the double-declining depreciation method.
  4. Accounting profits consider the FIFO (First In First Out) inventory valuation method whereas Taxable profit considers the LIFO (Last In First Out) inventory valuation method.
  5. Accounting profits show the positive or negative financial performance of the business whereas Taxable profit identifies the tax liability of the organizations.
  6. Accounting profit is calculated for the current financial year, whereas Taxable profit is deliberated for the previous year taking accounting profit as a base.

 

Frequently Asked Questions (FAQ) About Accounting Profit and Taxable Profit

📂 What Is profit after tax formula?

Profit after tax is the available net profit for stakeholders after they pay all the expenses and tax by a business unit.

Business unit includes private-limited, private-owned companies, public limited, and government-owned companies.

Profit after tax is achieved by subtracting tax rate from profit before tax.

That means that profit after tax is determined by total expenses subtracted from total revenue.

The geographical location of a country determines the tax rate.

👨 ‍ 👨 ‍ 👦 ‍ 👦 What Is the book profit of a company?

Book profit is defined as the profits earned by a company from its activities.

It’s computed by deducting the business expenses acquired in a specific financial year from the sales income and other profits generated from the sale of goods and services in the same financial year.

Book profit is the leftover cash after a company has paid all the expenses and indicated in the profit and loss statement of the business.

In simple terms, it’s the cash a company earns within a financial year by selling its goods and services deducted by the expenses for that year.

📞 Is income tax on gross or net?

People who get salaries every month remit income tax on their gross income as self-employed people and businessmen pay tax on their net revenue.

Income tax is imposed on net income instead of gross.

🖥 How do you calculate accounting profit?

Accounting profit refers to the available net income after deducting the explicit expenses and costs from the company’s total revenue calculated according to the accepted accounting principles.

Explicit costs are identifiable and measurable.

They include labor costs, material costs, overhead and production costs, sales and marketing costs, transportation costs, and many more.

Implicit costs aren’t taken into account since they are not incurred, and they’re notional.

These refer to the reported profits of a business according to the financial statements, also known as book profits.

Accounting profit is determined by deducting explicit costs from total revenue.


 

Infographic

Accounting Profit vs Taxable Profit

 

Conclusion

Profits are the ultimate purpose of every business organizations but the trade professionals, as well as others, must understand the distinction between Accounting profit and Taxable profit.

Business accounting is a complex process and both of these terms are derived as per the precise guidelines, standards, and acts that are defined for them.

Assets, earnings, expenses, and liabilities need to be categorized and placed accurately in books of accounts or financial statements to correctly calculate the profits or loss and payable taxes.

Thus, Accounting profit & Taxable profit are created to do the same.

Taxable profits adjust the accounting profit for tax reporting purposes that allows the organization to reduce their tax liability as no organization wants to pay more taxes.


 

Word Cloud for Difference Between Accounting Profit and Taxable Profit

The following is a collection of the most used terms in this article on Accounting Profit and Taxable Profit. This should help in recalling related terms as used in this article at a later stage for you.

Accounting Profit and Taxable Profit
Word Cloud for Accounting Profit and Taxable Profit

 

References

  1. https://bbronline.com.br/index.php/bbr/article/download/399/613
  2. https://www.researchgate.net/profile/Alfred_Tran/publication/268524273_The_Gap_between_Accounting_Profit_and_Taxable_Income/links/547011ca0cf2d67fc0311fb4/The-Gap-between-Accounting-Profit-and-Taxable-Income.pdf
  3. https://www.econstor.eu/handle/10419/109932

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