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Book Profit: How To Calculate Book Profit From Cash Profit?

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Book profit refers to the profit earned by a business from its operations, calculated as revenues minus expenses over a financial year. It considers all transactions, including those without cash flow like credit sales. Cash profit only includes actual cash inflows and outflows, and can be calculated from book profit by adding back non-cash expenses and subtracting non-cash revenues. Book profits on investments that have not been sold yet are called unrealized profits. In some countries like India, book profits are used for taxation purposes, such as calculating Minimum Alternative Tax for companies.

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Book Profit: How To Calculate Book Profit From Cash Profit?

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zaheerbds
945 views3 pages
Book profit refers to the profit earned by a business from its operations, calculated as revenues minus expenses over a financial year. It considers all transactions, including those without cash flow like credit sales. Cash profit only includes actual cash inflows and outflows, and can be calculated from book profit by adding back non-cash expenses and subtracting non-cash revenues. Book profits on investments that have not been sold yet are called unrealized profits. In some countries like India, book profits are used for taxation purposes, such as calculating Minimum Alternative Tax for companies.

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Book profit refers to the profit earned by a business from its operations, calculated as revenues minus expenses over a financial year. It considers all transactions, including those without cash flow like credit sales. Cash profit only includes actual cash inflows and outflows, and can be calculated from book profit by adding back non-cash expenses and subtracting non-cash revenues. Book profits on investments that have not been sold yet are called unrealized profits. In some countries like India, book profits are used for taxation purposes, such as calculating Minimum Alternative Tax for companies.

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945 views3 pages

Book Profit: How To Calculate Book Profit From Cash Profit?

Uploaded by

zaheerbds
Book profit refers to the profit earned by a business from its operations, calculated as revenues minus expenses over a financial year. It considers all transactions, including those without cash flow like credit sales. Cash profit only includes actual cash inflows and outflows, and can be calculated from book profit by adding back non-cash expenses and subtracting non-cash revenues. Book profits on investments that have not been sold yet are called unrealized profits. In some countries like India, book profits are used for taxation purposes, such as calculating Minimum Alternative Tax for companies.

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Book Profit

Book profits refer to the profit earned by the business entity from
its operations and activities and is calculated by deducting all
the business expenses incurred within a financial year from all
the sales revenue and other income generated from the selling of
goods & services within that same financial year.
It refers to money earned by an entity during a financial year by
selling products and services deducted by all the expenses
incurred during the same financial year.

Book Profit = Revenues – Expenses

How to Calculate Book Profit from Cash Profit?


Book profit, as we have discussed, is the profit as shown in profit
and loss account of the entity and considered to be the actual
profits because it considered all cash and non-cash
transactions. Like revenue generated through sales made on
credit and charging annual depreciation, in which no actual cash
transaction occurs and are just book entries.

Cash profit is the surplus generated through actual cash flows


occurred within an entity. That means it is calculated by
subtracting all the cash outflows (including all paid expenses like
salary, rent, bills, etc.) from the cash inflows (including cash
sales). Cash profit can also be calculated using book profits by
adding back all the non-cash expenses (like depreciation debited
in Profit and loss account and subtracting the non-cash
revenues (like credit sales).
Cash Profit = Book Profit + Non-Cash Expenses – Non Cash
Revenues
Or Book Profit = Cash Profit – Non-Cash Expenses + Non-Cash
Revenues

Book Profit: Financial Instruments or Investment


Tools
The profits made on investments that have not been realized yet
are called book profits. That means when example, the current
value of securities becomes higher than the actual cost paid, and
the securities are yet not sold but still owned by the holder, then
such profits are termed as book profits.

Note: Generally, such profits on financial instruments are not


taxed until they are actually sold, and profit or loss is realized.

Special Cases
In various countries, the calculation of book value by business
entities is for taxation purposes. Book value is treated as taxable
income, and a specific rate applies to the book value to calculate
the amount of taxes payable.

We are discussing the two major scenarios where the use of such
profits is for taxation purposes:-

#1 – MAT for Companies in India


MAT or Minimum Alternative Tax applied to companies that pay
dividends to its shareholders but not pay taxes under normal
Income tax provisions due to various exemptions and deductions
allowed.

We calculate MAT using book profits. Here it arrives after


applicable additions or deductions made to net profit, as shown in
the statement of profit and loss.

Book Profit = (Net Profit + Additions) – Deductions

#2 – Partnership Firm
In this case, it simply means the profits as computed before
remuneration paid to the partner. In other words, It is calculated
by adding back the salary and commissions paid to the partners
(if debited in P&L account) into the net profit as per profit and
loss account.

Book Profit = Net Profit + Partner’s Remuneration

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