Formula for Assessable Trading Income

The formula for assessable trading income is used to calculate the taxable profit derived from business activities. It begins with the accounting profit (or net profit per financial statements) and adjusts for tax-specific items, such as disallowable expenses, capital allowances, and income not reflected in the accounts. This ensures that only the correct taxable income is reported to the tax authorities.

1. General Formula

Assessable Trading Income =

Accounting Profit
+ Disallowable Expenses
− Capital Allowances
+ Taxable Income Not in Accounts
− Non-Trading Income Included in Accounts

2. Breakdown of Each Component

A. Accounting Profit

  • Net profit shown in the business’s income statement before tax adjustments.

B. Add Back Disallowable Expenses

  • Items deducted in the accounts but not allowed for tax purposes.
  • Examples: Entertainment expenses, depreciation, fines, personal use costs.

C. Deduct Capital Allowances

  • Tax-deductible allowances for qualifying capital expenditures.
  • Examples: Annual Investment Allowance (AIA), Writing Down Allowance (WDA).

D. Add Taxable Income Not in Accounts

  • Income not recorded in financial statements but taxable.
  • Examples: Unrecorded sales, recovered bad debts.

E. Deduct Non-Trading Income Included in Accounts

  • Income reported in accounts but not part of trading income.
  • Examples: Bank interest, dividends, property rental income (if not trading-related).

3. Example Calculation

Given:

  • Accounting Profit = $100,000
  • Disallowable Expenses = $12,000
  • Capital Allowances = $8,000
  • Taxable Income Not in Accounts = $2,000
  • Non-Trading Income Included in Accounts = $5,000

Assessable Trading Income =

$100,000 + $12,000 − $8,000 + $2,000 − $5,000 = $101,000

4. Key Notes

  • This formula ensures that the taxable profit reflects actual business performance under tax law.
  • Accurate records and proper categorization of expenses are crucial for correct computation.
  • Loss reliefs or adjustments (e.g. brought forward losses) may apply separately to reduce tax liability.

Application in Business Taxation

Using the assessable trading income formula ensures compliance with tax regulations and avoids underreporting or overreporting income. It helps businesses manage tax risks, maximize allowable deductions, and maintain accurate financial and tax records.