Differentiate between accounting profit and taxable profit

Finance Finance Management Banking & Finance

The term profit will differ from profession to profession. Businessmen will have different perspectives in terms of profit, economists will have different perspectives. According to accounts profit is nothing but excess of revenue over expenses.

This profit is called accounting profit. Taxable profit had a different sense, amount taxable as per provisions of income tax act. Taxable profit is calculated by taking accounting profit, non-allowable expenses (added), allowable expenses (subtracted) and the resulting income is credited in a P & L account.

Accounting profit

It results from operating activities and non-operating activities of the company. Accounting profit is the financial gain which is obtained by reducing total expenses of business to total revenue of business.

It determines how resources are allocated and reflects the company's profitability and future performance. Knowledge on company's liquidity, solvency and accounting profit helps

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.

Differences

The major differences between accounting profit and taxable profit are as follows −

Accounting profit	Taxable profit
Net income after explicit all costs from revenue.	Profits that are taxable, considers tax liabilities.
Continuous activity.	One-time activity.
Recognizes business profitability.	Derives tax liabilities of business.
Financial reporting.	Tax operating.
Guided by GAAP (Generally Accepted Accounting Principles) or Accounting Standards (AS).	Guided by Income Tax Act.
Total sales and explicit costs are taken as base.	Accounting profits and other costs are taken as base.
Only consider the current financial year.	Consider previous income also.

Conclusion

Both accounting profit and taxable profit are calculated for a period of time. Accounting profit is calculated using accounting principles and taxable profits are calculated using prescribed tax rules of the country. Mostly accounting profits are greater than taxable profit.