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Hi,
I am slightly confused on one thing. When we adjust the profits for tax allowances, i.e we added back the depreciation to take it to 3 million and worked out the capital allowances based on the 3 million. For the first year, it gave us a 2.5m allowance. so 3m – 2.5m = £500,000. The tax is now calculated on this figure of 500,000 which was 100,000. What I don’t understand is why the £100,000 tax expense is taken off accounting profits of 2m? which is actually the after depreciation profit? should it not be taken of the profit which was adjusted for capital allowances i.e the 500,000?
Hi,
The accounting profit is the figure before any tax has been charged, so in true FR speak it is the profit before tax (PBT) and hence the tax expense calculated will need to be deducted.
Where we add back depreciation, deduct the tax allowance to work out the profits chargeable to corporation tax, before then calculating the tax expense, this is just a working and does not form part of the financial statements themselves. It is merely the calculation of the figure to appear in the financial statements.
Thanks
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