Table of Contents
What is Accounting Profit?
Accounting profit is defined as the total earnings of a business after deductions of explicit costs. Explicit costs are expenses that directly affect the profitability of a business.
In other words, accounting profit is the profit left over after deducting expenses from revenues, following the Generally Accepted Accounting Principles (GAAP).
The expenses deducted include direct and indirect costs of running a business such as cost of goods sold, depreciation, labor, inventory, sales and marketing costs, overheads, and depreciation.
Accounting profit is used by the management of a business. This information helps them assess the performance of the business and compare it to their competitors and performances from previous years.
The formula to calculate accounting profit is as follows:
Accounting Profit = Total Revenue – Cost Of Goods sold – the cost of operation – non-operational costs
Unlike calculations of economic profits, opportunity cost is not measured when calculating accounting profit. Accounting profit only takes into consideration real book values.
The main aim of a business is profitability. Without calculating accounting profit, it would be hard to establish whether a business is meeting its objectives or not. In the case of loss, the management of a business can opt to re-strategize to ensure that profit is made.
What is Taxable Profit?
Taxable profit is the earnings of a business on which tax can be imposed. Taxable profit rules vary from country to country depending on the regulations that have been put in place.
Every year, the accounting department of a business takes the accounting profit of the previous year and uses it as a base to calculate the taxable profit. The period in which taxable profit is calculated is known as the assessment year.
For example, if we are currently in the period 2022 – 2023, the accounting department will take the accounting profit of the year 2021 – 2022 and use it to calculate the taxable profit of the company.
Taxable profit is not calculated as per the Generally Acceptable Accounting Principles (GAAP), but rather, as per the tax rules of the country in which a business entity operates.
Taxable profit reports are used by management, auditors, and tax authorities to establish the taxability of a business entity.
The formula used to calculate taxable profit is as follows:
Taxable profit = Total Revenue – Cost of Goods Sold – Operating Expense – Interest Expense – Total Exemptions.
Depending on tax regulations, some tax exemptions may apply. For example, in some jurisdictions, education institutions may be partially exempt from taxes. Businesses in other categories can sometimes enjoy partial tax relief.
Difference Between Accounting Profit and Taxable Profit
- Meaning: Accounting profit is the total earnings of a business after deducting explicit costs, while taxable profit is the total earnings of a business on which tax can be imposed.
- Objective: Accounting profit is used to establish the profitability of a business while taxable profit is used to establish the taxability of a business.
- Users: Accounting profit information is used by management and shareholders while taxable profit information is used by management, shareholders, and tax authorities.
- Regulations: Accounting profit follows regulations as set by the GAAP while taxable profit follows regulations as set by the tax authorities.
- General Public: Accounting profit is published to the general public at the end of the financial year while taxable profit is sent to the relevant department for further action.
Comparison Between Accounting Profit and Taxable Profit
|Parameters of comparison||Accounting Profit||Taxable Profit|
|Meaning||Revenue left after expense deductions||Revenue on which tax can be imposed|
|Objective||Establish profitability||Establish taxability|
|Users||Management, shareholders||Management, auditors, tax authorities|
|General public||Published to the public||Sent to the relevant department|