What is the accounting profit?
Accounting profit is defined as the net income of the
company obtained by subtracting all expenses from gross income. The accounting
profit is calculated in accordance with the standards established in the
Generally Accepted Accounting Principles (GAAP).
Accounting profit is the net profit left after deducting all
explicit costs (such as labor costs, production costs, raw material costs,
transportation / distribution costs, sales and marketing costs and other costs)
of total business income under GAAP. ...
To establish accounting profits, accountants calculate the
company's total revenue and then deduct direct costs, not hidden costs.
Therefore, companies had to distinguish between explicit and implicit costs. In
these scenarios, income refers to all income earned by the company and direct
costs are all expenses incurred by the company during the same period.
Countable income is also often confused with other types of
income, such as taxable income, cash income, and economic income. While these
three types of earnings are not widely used, they are still critical to a
business.
Costs deducted from gross income generally include labor
costs, raw material acquisition costs, transportation costs, marketing and
sales costs, production and general costs, etc.
Accounting profit formula
The accounting profit is calculated as follows.
Net income = Income - Cost of sales - Operating expenses -
Non-operating expenses - Corporate taxe
Accounting profit example
Let's take a expression at the concept of accounting profit
with an example. Suppose ABC owns a chocolate shop and analyzes the monthly
financial statements. ABC's monthly income is $ 40,000,000.
Other expenses are:
Production costs: USD 13,000,000.
Administrative expenses - USD 5,000,000.
Marketing expenses: USD 3,000,000.
Financial expenses - USD 2,000,000.
Taxes - USD 2,000,000.
Total explicit cost = $ 25,000,000.
Accounting profit = Income - Explicit expenses = US $
40,000,000 - US $ 25,000,000 = US $ 15,000,000
Accounting profit versus economic profit
The economic benefit of a company can be derived from its
accounting profit. To do this, the business needs to deduct hidden costs from
accounting earnings. The latter is obtained by subtracting the total costs
incurred from the total income received. Implicit costs include business
opportunity costs.
In other words, the economic gain includes both explicit and
implicit costs. Opportunity cost can be defined as the lost cost of choosing a
business method over an alternative. Therefore, these costs are somewhat
subjective. Financial gain can help a company determine its performance.
Therefore, the economic profit is more of a theoretical
calculation reflecting on what could be done as a course of action. This type
of benefit also greatly assists management in determining the best business
decisions to make. Investors rely on economic returns to measure the
profitability of a business and then decide whether to invest in the business
or not.
Accounting profit versus cash profit
The monetary profit of the company shows the profit obtained
in monetary terms. While accounting profit refers to net income, cash profit is
simply the difference between a company's cash inflows and outflows. As a
result, if the cash inflow exceeds the cash outflow, the business is considered
to have generated cash earnings.
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