I suspect that Nicks excellent reply whilst it answers the question may have lost you.
To add to Nicks post and to put the three in simple terms
Accounting Profit : Net Profit
Trading Profit : Gross Profit
Taxable Profit : start with Net profit (Accounting Profit) and apply adjustments for items not allowable for tax purposes (depreciation, entertaining, etc.).
Now, considering the above go back and read Nicks reply and between the two replies the bits should fall into place.
kind regards,
Shaun.
p.s. Nick, that was nothing against your reply I was just thinking about the answer from the perspective of the level of the original question.
-- Edited by Shamus on Monday 15th of July 2013 05:57:26 PM
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
What is the difference between accounting profits, trading profits, taxable profits ?
Best regards,
Adrian
A good accountant!!!
Seriously though, you are right, the earnings for the Class 2 do take into account depreciation even! I think that this is because those under the limit maybe do not have an accountant so to keep the calculation simple they just go on the accounting profit.
It is also more likely that the difference between the taxable and accounting profits is not so great in small companies as the capital allowances will probably not be so great.
I know the above is generalising immensely and that small taxable profit does not mean small business, i was just thinking of the small self employed decorator with no assets etc.
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Nick
Nick Craggs FMAAT ACA AAT Distance Learning Manager
Would Trading Profit not more normally be regarded as the net profit (in accounting terms - not tax terms) from trading activities as opposed to, for example, from investing activities?
PS I've just realised that my comment above is in a completely different context and not germain to the original poster's question. I suspect that terminology is being used somewhat loosely by AAT since Class 4 NIC is calculated on Self assesment forms with reference to taxable profits (maybe they mean to imply taxable profits from a trade or profession?)
-- Edited by bro0010 on Tuesday 16th of July 2013 10:27:30 AM
Happy to be proven wrong but I don't believe that I am in this instance.
lets take a simplified P&L
Sales x
Cost of sales (x)
Gross Profit x (Sometimes referred to as Trading Profit)
Expenses (x)
Net (Operating) Profit x (Sometimes referred to as Accounting Profit)
Tax (x)
Dividends (x)
Retained Earnings x
For taxable profit you start with Net (operating) profit and add back the expenses not allowable for tax purposes (over simplification there but thats the general principle) whch you then calculate the tax on which goes to the bottom part of the P&L in calculationg the profit / loss figure to be taken opver to the balance sheet.
kind regards,
Shaun.
p.s. Adrian, thats why the tax shown on the P&L is not a % of the net. Indeed the net on the face of the P&L has no direct relevance to tax payable. In some circumstances it is possible that you could even hit a situation where the tax figure is larger than the net figure turning a profit into negative retained earnings.
-- Edited by Shamus on Tuesday 16th of July 2013 11:04:11 AM
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
you amended yours whilst I was answering so I think that we're cool in that the real issue is AAT using terms that are not used often and are not how they are referred to in the financial statements (why can't they just refer to them as gross and operating (or net) profit).
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
The way that the question was phrased is not how we would normally refer to these fields.
You don't really expect AAT texts to be trying to catch you out but I think that was the case here and I'm sure a good many already qualified had to think for a minute about which was actually referring to what in the financial statements.
What the question though was really aiming for was for the reader to differentiate between profit in the accounts and profit for tax purposes which is quite different.
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
