We all know tax is a compulsory levy paid to the government of state or country by individuals and companies that live in that country.
We make these contributions to the government as a Civic duty and used by the government to provide basic amenities such as roads, water and electricity.
Tax only becomes payable by those in employment because they take it from their monthly salaries. As for companies, they make it from income. They charge a percentage and deduct from their income, and it pays the tax for that period.
Usually, we consider what it left as profit for the individual or company. But what about the income before the tax deduction? In this article, we discuss Profit before Tax.
What is a Profit?
One of the sole purposes of businesses and individuals is to create and manage wealth. we manage wealth by making money; however, the process is not complete, as there are operating expenses to in consideration. You only create wealth entirely when those expenses are deducted, and that is what profit is.
What is Profit Before Tax?
Based on the definition of tax above, profit before tax is a metric that considers a company or an individual’s profits before they have to pay their taxes on income. All expenses accounted for and deducted when calculating profit before tax, except tax itself.
In simpler terms, suppose Mr A or company AXS makes =N= 150,000 every month as income. Their total expenses for that month amount to =N= 25,000 and tax is chargeable at 5%. Without adding in the tax, the amount arrived at when expenses are deducted (=N= 125,000) is profit before tax.
Also take time to read more about Value Added Tax (VAT)
Why is it important to calculate Profit before Tax?
Nothing ever really remains constant, and it does not exempt tax from this rule. Tax expenses change constantly, and so do income and expenses.
This means any amounts calculated or arrived at in one particular period are most likely to be very distinct from those arrived at in another period.
All of this can make it challenging to monitor the pattern of things.
As a result, an individual or company should calculate PBT to clearly understand how much they earn regularly.
How is Profit before Tax beneficial?
As an individual, PBT, or earnings before tax, can be useful either in personal accounting (that is, accounting of your financial activities) or as a tool in investment.
Before investing, it would be essential to know just how much your prospect is making every year before you deduct tax.
As a company, it helps to keep track of periodic performances.
How is Profit Before Tax calculated?
PBT, as stated earlier, is merely the calculation of all profits minus the expenses for the period in question except tax.
You could also calculate it by adding up your net income/profit with the amount charged as income tax.
CONCLUSION
Profit before tax is a considerable measure of financial performance. However, either it is on a personal level, or on that of businesses.