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Measurement of Income Tax on Period Profit

Measurement of income tax on period profit, both tax to be paid (resulting from the fiscal accounts) and the one and only real tax burden in the internal documents (management accounting) as well as the tax costs in the published accounts (financial accounting), can all be calculated by means of The Profit Formula®, quickly and easily. Also special items, for instance tax-free revenues and losses that are not fiscally acknowledged, can easily be processed. Anybody can measure any reasonable period profit with The Profit Formula®. Counting and calculating is absolutely minimal and exceptionally simple via a direct way to the solution. Short and easy. A tremendous amount of money can be saved with regard to administration and fringe costs, also in case of pure nominalism (HC-accounting). The budgets of many accounts departments can be cut drastically.

Direct mutations in the share capital are out of the question and the unity between internal balance sheet and profit and loss account cannot be disaggregated, of course concerning a specific business and exclusive capital withdrawals and likewise payments. Balance sheets, profit and loss account, statement of source and use of funds relate to the very same money units during a certain period of time but viewed from different angles. They cannot miss one single money unit. Both the balance sheets at the beginning and end of the period under consideration and the profit and loss account, have to go hand in hand and fit together.

There are many allegations in economic literature about the settlement of taxes. Allegations without proof. It is said in the wording of many exemplary problems, tax should be counted in different ways, regarding various assets. However, only one tax rate is given and fiscally spoken it really does not matter in which asset the money goes round. Whoever is not aware of the real tax burden nor fully counts it, endangers the continued existence of the company. So-called ‘overdruk‘, why should it be transferred to the P/L-account in some cases, but not always? The proof should be given for each and every figure, and not just the tax amounts involved. The complete accounts have to fit together. A lot has been written down in economic literature about the burden of taxation. For instance the ‘methode-Nederstigt‘ and the ‘methode-Van Hoepen‘, allegations – without any proof.

Both tax to be paid (resulting from the fiscal accounts) and the one and only real tax costs in the internal documents (management accounting) follows directly from the calculation scheme by The Profit Formula®. The gross and net profit figures that one likes to publish or has to publish according to law, rules and regulations i.e. the published accounts (financial accounting), can also be calculated in the same way. Everyone can enter his/her own values and standards, according to US-GAAP or whatever. The Profit Formula® is value-free. It is a universal profit-meter, suitable for measuring real (scientifically correct) as opposed to artificial (defined at will) profit. Inputting fiscal premises will lead to the fiscal profit figure. The one and only real period profit can be found exclusively by inputting the real values and standards.

The difference between tax costs calculated (i.e. real tax burden) and tax to be paid happens to be ‘provision latent tax’ at the right side of the balance sheet or it appears as the asset ‘fiscal claim’ at the left side of the balance sheet in case tax to be paid exceeds the real tax burden. Regarding (further) compilations of latent tax, the valuation of this entry onto the balance sheet, once again a lot has been written down in economic literature. As if such an outcome is an object to haggle over. Provision latent tax is a derived transitory item. It is valid at the very balance sheet date and is an outcome that does not need nor allow further compilation. Eventually, limits can be set, notably to the asset ‘fiscal claim’; via corrections resulting in extraordinary gains and losses. Particulars should supplementary be processed. Such special items do not alter the basic reckoning scheme, the algorithm, The Profit Formula®. One or more extra items can simply be implemented at the appropriate places in the basic scheme. It’s the basic question 1: how high (or how low) is the period profit? One needs a proven answer. The answer to the question ‘how big is the cake?’ relates to the answers to be given to other questions like the pay-out ratio. Generally a high profit solves a lot of problems. Who gets which piece of the cake, and whether or not everybody (or most people) is satisfied, depends heavily on the answer to the first question.

Managers seem to be in a perpetual panic to encounter a shortage of money sooner or later, true enough, as long as one does not know the one and only proven period profit. Internal profit and equity relate to profit measurement by no other law or rule than pure science. What an enterprise likes to publish or has to publish according to law, rules and regulations, is (in the author’s opinion) quite another story. The having gone bankrupt companies showed annual accounts authorised by the accountant until the end. A lawyer who saw a lot of bankruptcies happen once said: ‘the audit by a chartered accountant guarantees only that the figures are added up correctly; there is no guarantee whatsoever that the figures are indeed correct, in conformity with the reality.’ Verified internal profit and yield-figures – information produced for management decisions within the firm – are the most important considerations for the management of a company. What does the top executive say in the published reports of the company, if he/she doesn’t fully understand what has happened him-/herself? Top-management is responsible for everything; for the annual account to be published too. Tell it like it is. People will guess at what is not explained. Regarding management accounting, responsible management is in need of the proven right net period profit figures.

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Jan Jacobs

Jan Jacobs

Independent Researcher Business Economics
Jan Jacobs, an independent researcher in the field of business economics and author of The Profit Formula®: The Way to Easy Profit Measurement. I have more than 20 years of experience as a lecturer in business economics in higher day education and also in evening education for adults at SWOT (Stichting Wetenschappelijke Opleidingen Twente).

As a subject teacher, I have always been critical of what was in many Business Economics textbooks. I am the author of The Profit Formula®: The Way to Easy Profit Measurement, Budgetary Control: Scientific Perfection Business Economics, and Banking World Finance Credit Crises: Tips, Facts and Editorials about what happened and what needs to be done.

Jan Jacobs is an opinion columnist for the CEOWORLD magazine. You can follow him on LinkedIn, Amazon, and JBAdatabank.