ACCA Taxation (F6) Practice Exam

What must be done with profit before applying basis year rules for businesses?

1. It must remain unchanged

2. It must be documented for future reference

3. It should be adjusted

4. It should be calculated on annual reports

The correct answer is: It should be adjusted

Before applying basis year rules for businesses, profit must be adjusted. This adjustment is crucial because it ensures that the profit reflects the true financial position of the business for tax purposes. Adjustments may include the consideration of items such as non-taxable income, capital allowances, or disallowed expenses. These adjustments allow for a more accurate calculation of taxable profit, facilitating the determination of the correct tax liability for a given year. In contrast, leaving the profit unchanged would not account for necessary modifications that reflect compliance with tax legislation. While documenting for future reference is always advisable in managing business accounts, it does not directly impact the application of basis year rules. Calculating profit based solely on annual reports may lead to inaccuracies without the necessary adjustments, as reports often contain figures that have not been modified for tax purposes. Thus, adjusting the profit is essential for aligning it with the requirements of the taxation framework.