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Profit accounting and taxable income accounting

Introduction

You’re probably thinking that this section of the chapter is about how a business’s bottom-line profit – its net income – drives its taxable income amount. Actually, we want to show you the exact opposite: how income tax law drives a business’s profit accounting. That’s right: Tax law plays a large role in how a business determines its profit figure, or more precisely the accounting methods used to record revenue and expenses.

Expanded theme

Before you explore that paradox, you need to understand something about the accounting methods for recording profit. For measuring and recording many expenses no single accounting method emerges as the one and only dominant method. Accountants have a certain amount of legitimate leeway in measuring and reporting the revenue and expenses that drive the profit figure. Therefore, two different accountants, recording the same profit-making activities for the same period, would most likely come up with two different profit figures – the numbers would be off by at least a little, and perhaps by a lot.Read more about Tamilmv

Conclusion

And that inconsistency is fine – as long as the differences are due to legitimate reasons. We’d like to be able to report to you that in measuring profit, accountants always aim right at the bull’s-eye, the dead Centre of the profit target. One commandment in the accountants’ bible is that annual profit should be as close to the truth as can be measured; accounting methods should be objective and fair. But in the real world, profit accounting doesn’t quite live up to this ideal.

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