Accounting Profit

Accounting profit is calculated by subtracting all expenses from gross revenue to get the firm’s net revenue. Accounting profit is calculated in accordance with Generally Accepted Accounting Principles (GAAP). Accounting profit is the net income left after subtracting all of the business’s explicit expenditures (such as labour costs, production costs, transportation/distribution costs, raw material costs, sales and marketing costs, and other expenses) from total revenue.

Accountants estimate accounting profit by calculating a company’s entire revenue and then subtracting just the direct costs, not the implicit ones. As a result, organisations must be able to distinguish between explicit and implicit costs. In such cases, revenue refers to all of the company’s earnings, while direct costs relate to all of the company’s expenses within the same time period.

Accounting Profit Formula

The formula for accounting profit is given as:

Net Income = Revenue – COGS – Operating Costs – Non-Operating Costs – Corporate Taxes

Accounting Profit Example

Sandy decided to leave her $150,000-per-year job as a business analyst to open a coffee shop. She made a $30,000 accounting profit in 2019.

Sandy’s  profit will be the coffee shop’s profit less the opportunity cost of job she left.

Accounting profit = 30000 – 150000=-$120000

Sandy would recognise that she is still generating a profit and keep her coffee business running with rational thinking, but such a large financial loss could force her to return to her prior work.

Accounting Profit vs Economic vs Underlying Profit

Accounting Profit vs Economic Profit

Accounting profit can be used to calculate a company’s economic profit. To accomplish this, a company must deduct its hidden expenses from its accounting earnings. The economic profit is calculated by subtracting the total expenses from the total revenue. The opportunity costs of business are included in implicit expenses.

Economic profit includes explicit as well as implicit costs. The expense of foregoing one business approach in favour of its alternative is known as opportunity costs. As a result, these charges are fairly arbitrary. Economic profits can aid in determining a company’s efficiency. As a result, economic profit is more of a theoretical result, one that considers what course of action could have been pursued. This form of profit also helps managers make the best company decisions possible. Investors use economic profits to assess a company’s profitability before deciding whether or not to invest in it.

Accounting profit is distinct from economic profit as it simply represents a company’s monetary expenses and revenue.

Accounting Profit= Total Revenue-Explicit Cost

Economic Profit=Total Revenues-(Explicit Costs + Implicit Cost)

Accounting Profit vs. Underlying Profit

Unlike accounting profit, underlying profit is subjective and dependent on one’s own perception of what a company’s genuine earnings should be. Because of their rarity, underlying profit can be determined by excluding extraordinary one-time charges.

As a result, underlying profit excludes unanticipated or unusual occurrences that could affect the profitability, such as natural disasters. Such an approach usually only considers the day-to-day, predictable costs that a company would incur while executing its operations. Accounting profit, on the other hand, takes into consideration all values recorded in financial accounts, regardless of their frequency or normality.

Advantages of Accounting Profit

1. The accounting profit reflects the business’s performance and financial status.
2. Accounting profit is a metric that may be used to compare enterprises.
3. The profit figure can be applied to business choices.
4. Profit can either attract or discourage investors from investing in the company.

Disadvantages of Accounting Profit

1. Accounting profit is not used to compare organisations with differing depreciation and amortisation, impairment, provisions, accruals, and valuation procedures.
2. Varied countries have diverse taxation regulations and different techniques of presenting financial statements.
3. Profits can be managed to appear to be higher than they actually are.

Conclusion

Accounting profit is calculated in accordance with Generally Accepted Accounting Principles (GAAP). Accounting profit is the net income left after subtracting all of the business’s explicit expenditures.

The formula for accounting profit is given as

Net Income = Revenue – COGS – Operating Costs – Non-Operating Costs – Corporate Taxes

Accounting profit can be used to calculate a company’s economic profit. The accounting profit reflects the business’s performance and financial status. Accounting profit is a metric that may be used to compare enterprises. Accounting profit is not used to compare organisations with differing depreciation and amortisation, impairment, provisions, accruals, and valuation procedures. Varied countries have diverse taxation regulations and different techniques of presenting financial statements.