Calculation of trade profit

In this lesson

1. 0:00 Calculating trade profit for unincorporated businesses
2. 0:34 Cash basis versus accruals basis explained
3. 1:17 Adjusting profit and loss for tax purposes
4. 2:17 The adjustment pro forma structure
5. 3:03 Allowable expenses and the wholly exclusively test
6. 4:03 Capital expenditure rules under each basis
7. 4:33 Specific allowable expenses with examples
8. 6:57 Disallowable expenses you must add back
9. 8:34 Common disallowances and edge cases

About this lesson

You'll discover the difference between cash basis and accruals basis accounting, understand which expenses are allowable deductions and which must be added back, and work through the pro forma adjustment calculation that forms the foundation of trade profit computations. This is essential knowledge for the Taxation (TX) paper, where you'll regularly need to take an accountant's profit figure and adjust it to arrive at the tax-adjusted trade profit. The video covers the two main methods for calculating trading profit. On a cash basis, you simply take what you've physically received minus what you've physically paid. On an accruals basis, you take what you should have received minus what you should have paid, excluding capital items. The key principle is that not everything in the profit and loss account is allowable for tax purposes, so you'll learn to use a standard pro forma: start with profit per the accounts, add back disallowed expenditure, add in trade income not included, deduct items not taxed as trade profit, deduct allowable expenses not in the accounts, then subtract capital allowances to reach your tax-adjusted figure. You'll then explore the detailed rules around allowable and disallowable expenses. The general rule is that expenses must be incurred wholly and exclusively for trade purposes. The lesson walks through specific categories including pre-trading expenses, charitable donations, repairs and maintenance, staff costs, and bad debts. It also covers common disallowable items you'll encounter in exam questions: business gifts over £50, general provisions, sole trader drawings, excessive payments to family members, depreciation, capital expenditure, training in new skills, car lease costs with high CO2 emissions, fines and penalties, business entertaining, and tax interest. Understanding these distinctions is critical for accurately adjusting profits in your TX assessments.

Duration: 11m