Difference Between Accounting Profit and 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.

Key Takeaways

1. Accounting profit is the net income reported on financial statements, calculated by subtracting total expenses from total revenues.
2. Taxable profit is the income a business must pay taxes, determined by applying tax regulations and adjustments to the accounting profit.
3. Differences between the two arise from variations in accounting methods, allowable deductions, and tax regulations that impact income calculations.

Accounting Profit vs Taxable Profit

The difference between Accounting Profit and Taxable Profit is that Accounting profit refers to the earnings calculated based on the accounting standards or GAAP (Generally Accepted Accounting Principles), 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.

Comparison Table

Parameter of Comparison	Accounting Profit	Taxable Profit
Definition	Accounting 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 Type	On-going as it continuously considers the payments and receivables.	One-time as taxes are calculated once all amount is received and paid.
Aim	The main aim is to recognize the business profitability as a whole.	The main aim is to derive the tax liability of the business enterprise.
Scope	Accounting profit comes under the scope of financial reporting.	Taxable profit or income comes under the scope of Tax reporting.
Guidelines	Defined Accounting standards or GAAP	Income Tax Act
Base	Total sales & explicit costs.	Accounting Profit and other costs.
Consider	Current 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.

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.

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.

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.

References

1. https://bbronline.com.br/index.php/bbr/article/download/399/613
2. https://www.econstor.eu/handle/10419/109932