Difference Between Accounting Profit and Taxable Profit (With Table)

Both Accounting Profit and Taxable Profit are profits made by an organization. However, both terms are different. While accounting profit is the difference between total revenue and total expenses of an organization, the taxable profit is the profit that is taxable according to the relevant provisions of a competent tax act.

Accounting Profit vs Taxable Profit

The main difference between accommodation and modification is that while accounting profit is calculated to determine the success of an organization, taxable profit determines the profit that is taxable according to relevant tax laws.  

Accounting profit is the actual gain obtained after deducting all business expenses from total income. It is a forecast of the company’s profits and performance in the future. Also, it determines the efficiency of resource distribution of a company. 

On the other hand, the part of an organization’s profit that is liable to income taxes is referred to as taxable profit. In principle, it distinguishes between profit and actual earnings. In simple words, the taxable profit is the income or profit of an organization that is taxable.

Comparison Table Between Accounting Profit and Taxable Profit

Parameters of ComparisonAccounting ProfitTaxable Profit
DefinitionAccounting profit is the financial profit of a company. Also known as bookkeeping profit, it is obtained by subtracting total expenses from total revenue.Taxable profit is the profit made by a company that is taxable according to the provisions of competent tax legislation
Why it is used?Accounting profit is often used to determine the solvency and liquidity of a company. It is also a touchstone to determine its health, success, efficiency, economy, and effectiveness.Taxable profit is used to determine the profit on which the company is liable to pay taxes. 
Accounting methods usedAccounting profit uses various accounting standards like International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). To calculate depreciation, it uses the straight-line method. Finally, it uses FIFO (First In, First Out) methods for accounting. Methods to determine taxable profit differs depending on the laws of taxation. To calculate depreciation, it uses the double-declining method. Finally, for accounting, it uses LIFO (Last In, First Out) method. 
Special casesEvery company or organization will have an account book for calculating accounting profit.The government may exclude certain organizations from taxable profit by designating them as nonprofit entities.
NatureAccounting profit is a continuous exercise. Since every sale has to be recorded day-by-day, it never ends. Therefore, it uses an accrual-based model which shows amounts that the company will receive in the future.  Taxable profit is a one-time calculation because it is calculated for the preceding financial year. Therefore, it uses a cash-based model where only actual money exchange is taken into consideration, irrespective of future payments. 
Year for which the profit is calculated forThe accounting profit of any organization is calculated for the current financial year.Taxable profit is calculated for the preceding financial year.

What is Accounting Profit?

Accounting profit is a corporation’s profit (total expenses subtracted from total revenue) that contains all revenue and expense items required by an accounting framework. This profit statistic can be seen in a company’s financial accounts and is widely used to assess the company’s efficiency, economy, and effectiveness.

Two accounting frameworks are the International Financial Reporting Standards (IFRS), the Generally Accepted Accounting Principles (GAAP), and other accounting standards. Accounting profit uses the straight-line method for calculating depreciation. Also, it uses FIFO (First-In, First-Out) accounting method.

When total recorded revenues exceed entire recorded expenses, an accounting profit is achieved. In the opposite circumstance, the difference between total recorded revenues and total recorded expenses is an accounting loss.

Examples of expenses taken into consideration include wages paid to the workers and other officials in the form of salary, bonuses, or other forms, materials necessary for production, raw materials, power and transportation costs, sales and marketing expenses, overhead and production costs, etc. 

Accounting profit is one of the most essential data sources for investors since it contains all revenue and expense reporting. Accounting profit, since it is more comprehensive, is a more reliable measure of total results than gross profit or operational profit data.

What is Taxable Profit?

The taxable profit is the profit on which income taxes are due. What all earnings can be considered as taxable differs per taxing authority. Therefore, the taxable profit will differ depending on the laws of the taxation in the area where an organization is located or does business. In India, the relevant sections of the Income Tax Act of 1961 determine taxable profit.

In India, the taxable profit is calculated using accounting profit as the base. Every year in the assessment year, the preceding year’s return is filed with the income tax department. It is further used to calculate the taxable profit of the company.

A government can also proclaim nonprofit status for some qualified organizations, exempting some earnings from income tax. 

Since it represents the organization’s payable or recoverable income tax, the taxable profit is included on its balance sheet. Taxable profit is determined for the previous year. 

In taxable profit, a double-declining depreciation method and LIFO (Last In, First Out) accounting technique are used.

Main Differences Between Accounting Profit and Taxable Profit

  1. Accounting profit, also known as financial profit or bookkeeping profit, determines the actual profit earned by the company by subtracting total expenses from total revenue. On the other hand, taxable profit determines the amount that is taxable according to a tax act.
  2. While accounting profit considers financial transactions and exchanges made by a company in the current financial year, taxable profit considers the same in the previous financial year.
  3. Accounting profit is a continuous process as the company will have regular transactions. However, taxable profit considers all money exchanges made by the company in the previous year, and hence, it is a one-time process.
  4. Accounting profit is subjected to regular financial auditing whereas tax profit is subjected to tax auditing.
  5. While accounting profit uses total sales and expenses made by an organization. However, tax profit uses accounting profit as its base.

Conclusion

To sum up, accounting profit and taxable profit are both profits made by a company. Accounting profit determines the financial profit of a company, i.e. the difference between total revenue and total expenses. However, taxable profit determines the tax liability of the company. Also, while accounting profit is governed by the rules of accounting standards, the rules of calculating taxable profit differ according to the laws of various jurisdictions. 

References

  1. http://bbronline.com.br/index.php/bbr/article/view/399
  2. https://heinonline.org/HOL/LandingPage?handle=hein.journals/austraxrum13&div=27&id=&page