Lesson 1 of 6 · 12 min
Accounting profit, taxable income and the tax base
A company keeps two sets of rules, one for its financial statements and one for the tax authority, so its accounting profit and its taxable income are rarely the same number.
In short
- Accounting profit (pretax income) follows accounting standards; taxable income follows tax law.
- Income taxes payable is the tax owed on taxable income: a balance sheet liability. Income tax paid is the cash that settles it.
- Income tax expense (the provision for income taxes) is the income statement charge: taxes payable plus the change in deferred taxes.
- The tax base is what an asset or liability is worth for tax purposes; the carrying amount is what it is worth in the financial statements.
- Differences come from timing, items that only one system recognises, different treatment of gains and losses, tax loss carryforwards and prior-year adjustments.
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