Two related, but genuinely different, calculations
Your P&L shows a $60,000 profit.
Your tax return shows taxable income of $71,000. Nobody made an error — accounting profit and taxable profit are simply answering two different questions, using two different rulebooks.
The short answer
Accounting profit measures how your business performed, following accounting standards and the judgement calls that go with them. Taxable income measures what the tax law says you owe tax on — a related but distinct calculation, built from your accounting profit but adjusted for specific items the tax law treats differently.
Where the two numbers commonly diverge
| Item | Accounting treatment | Tax treatment |
|---|---|---|
| Depreciation | Based on the asset's genuine estimated useful life | Based on ATO-set rates or small business pooling rules, which are often faster or slower than the accounting estimate |
| Entertainment expenses | Recorded as a genuine business expense | Generally not deductible at all, regardless of accounting treatment |
| Bad debts | Recognised as a provision once considered likely uncollectible | Only deductible once formally written off, meeting specific ATO conditions |
| Prepaid expenses | Recognised in the period they relate to | Sometimes required to be spread over the service period or a set number of years |
| Capital gains on assets | May not appear in ordinary P&L at all | Subject to specific capital gains tax rules, sometimes with concessions reducing the taxable amount |
A simple way to think about it
Your accounting profit is the honest financial story of your business — what you earned, what you spent, and what's genuinely left over. Your taxable income starts from that same story, then applies a specific set of adjustments the tax law requires — adding back some things that aren't deductible for tax purposes, and sometimes allowing faster or slower deductions than your accounts show. The two numbers rarely match exactly, and that's expected, not a sign something's wrong.
A simple example
A business's accounts show a $60,000 net profit for the year. During reconciliation for the tax return, $8,000 of client entertainment expenses (not tax-deductible) is added back, and $3,000 of extra depreciation is claimed under the instant asset write-off beyond what the accounts recognised — landing on taxable income of $65,000. Neither the $60,000 nor the $65,000 is “wrong” — they're answering different questions under different rules.
Why understanding this gap matters
Without understanding this distinction, it's easy to be caught off guard — assuming your tax bill will track your accounting profit exactly, then being surprised when it doesn't. Reviewing the reconciliation between the two — what your accountant typically prepares as part of your tax return — is genuinely useful, not just a compliance formality: it shows you specifically which items are creating the gap, which is often useful information for future planning.
A quick self-check
Do I understand, broadly, why my accounting profit and taxable income won't match exactly?
Have I looked at the reconciliation between the two figures on my last tax return?
Do I know which specific items — entertainment, depreciation timing, prepayments — are driving the gap for my business?
Am I using my accounting profit, not an assumed tax figure, to genuinely understand how the business performed this year?
When should you get professional help?
you want to understand exactly what's driving the gap between your accounts and your tax return this year;
you're planning a significant transaction and want to understand its tax impact before it happens, not after;
you want your accounting records structured in a way that makes the year-end tax reconciliation smoother; or
your taxable income has moved unexpectedly and you want the specific cause identified.
Continue learning
→ What Is Depreciation — and Why Can't I Always Claim an Asset Immediately?
→ Meals, Coffee, Entertainment and Client Functions — What Can My Business Actually Claim?
→ What Should I Give My Accountant at the End of the Financial Year?
SKC Accounting | Knowledge Centre | Knowledge Guide 070
Last reviewed: August 2026
General information only. This guide does not take into account your individual circumstances and is not a substitute for professional accounting, taxation, legal or financial advice.