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Chapter 2

The accounting profit is the profit shown in the financial statements before taxation.

Income exempt from tax or taxed under other rules is any income included in the
accounting profit which does not relate to the main trading activity, i.e. rental income,
dividend income, interest receivable, etc, that maybe taxed under other rules or
income exempt from taxation under that particular countries rules.

Disallowable expenses are expenses that have been deducted from the accounting
profit, i.e. they are allowable under the accounting standards, but for tax purposes
can't be claimed. These expenses will differ from country to country and the examiner
will always tell you the rules for that particular country in the question. Examples of
disallowable expenses in the UK are entertaining customers, gift aid payments, and
political donations.

Depreciation is added back because it is an accounting entry that is not allowed for
tax purposes because it is too subjective (i.e. you can choose the way to depreciate
your assets). It is replaced with tax depreciation.

Tax depreciation may be called capital allowances in the exam. The rules will be
given in the exam to tell you what can be claimed. It is a replacement for
depreciation. They are often given on a reducing balance basis. Allowances are
given if the asset is owned at the accounting date, i.e. no time apportionment for mid-
year acquisitions.

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