My accountant has just done our accounts and I noticed that the depreciation costs for the year were added to my profit, his explanation sort of makes sense because we have already claimed the cost of stuff the first year now this is year 3. We didn’t pay any Corp tax in year 1 now year 3 we have a lot to pay. Does this make sense to anybody?
I have been in business quite a while and accounting still baffles me.
I think you should ask your accountant to explain it to you better. As they would be better placed to give a reason for their actions.
There are a number of reasons Depreciation may be added to or taken away from profits, but your accountant would only know why it’s been done this way for you as they know the inner workings of your business and we don’t.
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It sounds to me as though you are talking about your taxable profits,i.e. for your tax return, rather than the profit in your accounts themselves?
To calculate taxable profits for corporation tax, you have to add back depreciation as it is a disallowable expense. You would then deduct capital allowances. It sounds as though your accountant claimed the full cost as a capital allowance in year 1 so now there is nothing to deduct in year 3.
In your accounts, on the other hand, the cost of the asset is written down to the P&L over its useful life by way of an annual depreciation charge.
The end result is the same, it’s just that in your accounts the profits are more evenly spread. In your tax return you generally get the whole benefit of the cost in year 1.
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