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The books and the return are different documents

Accounting profit is computed under accounting rules; taxable income is computed under tax rules. They start from the same transactions and they are not the same number, and neither one is a corrupted version of the other.

Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.

In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.

What it is for

Almost every confusion in tax accounting starts here. Somebody sees a profit of 240,000 in the accounts and a different figure on the return and assumes an error or a trick. Both are correct: they answer different questions set by different rule-makers for different purposes, and the reconciliation between them is a normal piece of work rather than an admission.

How to think about it

Start from accounting profit. Add back anything the accounts deducted that the tax rules do not allow. Subtract anything the tax rules allow that the accounts did not deduct. What you have is taxable income, and you keep the workings, because that reconciliation is what anybody reviewing it will ask for.

Worked example

Accounting profit from the books
Where the reconciliation starts.
Add back amounts the tax rules disallow
The accounts were right to deduct them; the return may not.
Subtract reliefs the tax rules give
Allowed on the return and not in the accounts.
The result is taxable income
A different number, correctly.

Your turn

Name where a reconciliation to taxable income begins.

Start from the  profit and adjust it

The trap

Assuming one of the two figures must be wrong. They are computed under different rules by design, and an accountant who tries to make them agree has misunderstood what each is for.

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