Accounting profit and taxable profit differ in accounting for income taxes in the following ways:
Accounting profit is defined in IAS 12, paragraph 5, as ‘net profit or loss for a period before deducting tax expense’, net profit or loss Being the excess (or deficiency) of revenues less expenses for that period. Such revenues and expenses would be determined and recognized in accordance with accounting standards and the conceptual Framework. Taxable profit is defined in the same paragraph as ‘the profit for a period, determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable’. Taxable profit is the excess of taxable income over taxation deductions allowable against that income.
Thus, accounting profit and taxable profit – because they are determined by different principles and rules – are unlikely to be the same figure in any one period. Income tax expense cannot be determined by simply multiplying the accounting profit by the applicable taxation rate. Instead, accounting for income taxes involves identifying and accounting for the differences between accounting profit and taxable profit. These differences arise from a number of common transactions and may be either permanent or temporary in nature.