Hello, Please explain me why the depriciation is added back to operating profit, whereas according to me depriciation is an allowable expense. Please provide full explanation.
Depreciation is a reserve which we used to deduct from our operating profit to minimize our tax. Thus after deducting the tax portion it is required to add back it at the time of calculating the overall profit of a tenure. The Government allows corporates to deduct the depreciation from their operating profit so that the corporates could grow by investing the depreciation reserve.
I mean to say if we are at operating profit than it means that we have already deducted depriciation and if we than add it back it would nullify the effect of depriciation and we will have a higher profit leading to higher tax liability. Still coudn't get it please help?
We need to add back depreciation with Profit after Tax (PAT), not with the Profit before Tax (PBT). We used to add depreciation because at the end of the period we need to get the overall physical cash in the box.
depreciation The profit is calculated by deducting depreciation. But the tax profits should use capital allowances and NOT depreciation. So we first add the depreiation back in, then deduct the capital allowance.
no capital allowances hi I understand that depreciation should be added back and capital allowances subtracted before calculating the tax. However, in the long questions in part 2 of the q and a bank, no mention is made of capital allowances, and the answers just calculate the tax based on the profit that has depreciation deducted (ie depreciation is not added back). If capital allowances are not mentioned, should tax just be calculated without adding back depreciation? Thanks
For simplicity, most questions will simply assume the depreciation and capital allowances are the same, so no adjustment to be made. If the examiners require you to use the company tax payable in an accounts question they will either tell you the amount of tax (£x) or tell you the rate (eg x% of profits)
