Corporation Tax Accounting

Profit-oriented entities must calculate their taxable income and pay corporation tax based on that income. This overview describes the measurement of income, called financial accounting income, according to generally accepted accounting principles. With one minor exception, which is calculating cost of sales, entities do not have to measure their financial accounting income according to the rules published by the tax authorities for calculating taxable income. It is an accepted legal principle that entities are entitled to calculate their taxable income according to whatever legitimate method results in the lowest income tax. The objective of measuring financial accounting income is quite different - you want to calculate income in the way that shows what actually has happened to the entity.

In your financial accounting, you are not bound by the corporation tax regulations. Nevertheless, you probably will handle the majority of transactions in the same way for both tax accounting and financial accounting and use information from your accounting system as a basis for most of the items on your corporation tax return. To do otherwise requires two separate sets of books, and this extra bookkeeping is not necessary for most items.

In at least two areas, it may be worthwhile to use different methods for the two types of accounting. They are cash basis accounting and depreciation.