Financial vs Taxable Income
Income is simply the total revenue for a period of time. From a business point of view, survival of an entity depends on its income or revenue. Income is expressed for a specific period. For example, one may say that my monthly income is $2000, or a company may say we earned $ 1 million during the last six months period. Stating income without time limit doesn’t make any sense. For an entity or organization, there is a legal requirement or legal duty to calculate financial income and taxable income.
Financial income or accounting income is the income that is published in the financial statements as revenue. Accounting income is calculated on the accrual basis; that means, even the income that is yet not received as money, but if earned during the financial period, is included to the income calculation. Accounting income is the one used to arrive at a profit for the financial period. In accounting income, the period for which income is calculated is mostly known as the financial year. However, there are companies that calculate accounting income for less than a year. The main purpose of calculating financial income is to show the performance of the company to the stakeholders, and hence facilitate them to make a decision regarding their interest towards the company.
Taxable income is the income calculated for the purpose of calculating and making payments to the Tax department of the country. This is a mandatory requirement for companies to comply with. Calculation of taxable income may vary from one country to another depending on the tax law of the country. Further, the tax rates and tax regulations are subjected to changes, and generally, amended every year. Tax law provides guidelines to arrive at taxable income. This may include or exclude some items that are not used to calculate accounting income. The taxable income is generally calculated for one year (there are very few exemptions); this time period is known as the tax year.
What is the difference between Financial and Taxable Income?
As their name denotes, both financial income and taxable income have some distinguishing features.
• Accounting income is based on the principle of accounting, whereas taxable income is based on tax law of the country.
• Always taxable income is lower than the accounting income.
• The time duration used to capture accounting income is known as the financial year, while the time duration for which taxable income is calculated is known as the tax year.
• Taxable income is calculated to compute and pay tax, whereas accounting income is calculated to present the performance of the company to the shareholders and stakeholders.
• Financial income is published publicly, but taxable income is exchanged only between Tax office and company.