WHERE ARE WE AT ...., page-11

Hi Fooca,
Accounting profit reflects dividend payments, fines, etc. (whereas taxable profits excludes these items).

Dividends can be paid from accumulated (i.e. life-to-date) accounting profits (aka Retained Earnings) and would in turn become part of Retained Earnings carried forward to the following year.

Another difference (or magic trick) between accounting and taxable profit is that accounting profit is based on accrual accounting whereby items that are reasonably expected to be incurred in the period, but are not yet contractually enforceable, are accounted for (i.e. accrued). A common accrual is for audit fees where an audit engagement letter has not yet been signed to agree fees prior to the year end, this expense should be reflected in the year end accounts as an accrual but is added back when calculating tax as no contract is in place. Instead, for tax, the actual cash payment made to the auditor in the year is deducted (i.e. the payment of the invoice relating to the prior year that was made in the current year).

Accrual accounting is basically about the timing of recognition of an item and is one of the reasons why the profit in your bank statement won't match that to your financial statements.

Thanks for all your hard work, cheers.