ACCA Taxation (F6) Practice Exam

Should you adjust profit before or after applying basis period rules?

1. Before applying the basis period rules

2. After applying the basis period rules

3. There is no need to adjust profit

4. Adjustments depend on the tax year

The correct answer is: Before applying the basis period rules

The correct understanding is that profit should be adjusted before applying the basis period rules. This approach ensures that any necessary adjustments to profits, such as for non-taxable income or disallowed expenses, are taken into account prior to determining the relevant accounting period for tax purposes. The basis period rules dictate which profits for a given period are taxable, often relating to the accounting periods of businesses. By adjusting profit beforehand, you align the profit figures with the period to which they relate accurately. This creates a clearer picture of the taxable income for the specific basis period, leading to correct tax calculations. In contrast, applying adjustments after the basis period may result in inaccuracies regarding which profits are attributable to that period, potentially leading to incorrect tax liability calculations. Adjustments should effectively reflect the situation of the business for the relevant tax year, and unadjusted profits could lead to overly simplified or incorrect assessments. Furthermore, while some options suggest varying conditions or scenarios for adjustments, the fundamental practice remains to adjust profits prior to determining basis periods, ensuring compliance with tax regulations and accurate reporting.