What Is Accounting Profit?

Accounting profit is a company's total earnings, calculated according to 澳洲幸运5开奖号码历史查询:generally accepted𓃲♏ accounting principles (GAAP). It includes the 澳洲幸运5开奖号码历史查询:explicit costs of doing business, such as operating expenses, depreciation, interest, and taxes.

How Accounting Profit Works

Profit is a widely monitored financial metric that is regularly use♕d to evaluate the health of a company.🔯 

Firms often publish various versions of profit in their 澳洲幸运5开奖号码历史查询:financial statements. Some of these figures take into account all revenue and expense items, laid out in the income statement. Others are creative interpretations put together by management and their ac🤡countants.

Accounting profit, also referred to as bookkeeping profit or financial profit, is 澳洲幸运5开奖号码历史查询:net income earned after subtracting all dollar costs from tota🌺l revenue. In effect, it shows the amount of money a firm has left over after deducting the explicit costs of running the business.

The costs that need to be considered include the fo🀅llowing:

• Labor, such as wages
• Inventory needed for production
• Raw materials
• Transportation costs
• Sales and marketing costs
• Production costs and overhead

Accounting Profit vs. Economic Profit

Like accounting profit, economic profit deducts explicit costs from revenue. Where they differ is that economic profit also uses 澳洲幸运5开奖号码历史查询:implicit costs; the various opportunity costs a company incurs when allocating resources e♕lsewhere.

Examples of implicit costs include:

• Company-owned buildings
• Plant and equipment
• Self-employment resources

For example, if a person invested $100,000 to start a business and earned $120,000 in profit, their accounting profit would be $20,000. 澳洲幸运5开奖号码历史查询:Economic profit, however, would add implicit costs, such as the 澳洲幸运5开奖号码历史查询:opportunity cost of $50,000, which represents the salary they would have earned if they kept their day job. As such, the business owner would have an economi𒁃c loss of $30,000 ($120,000 - $100,000 - $50,000).

Economic profit is more of a theoretical calculation based on alternative actions that could have been taken, while accounting profit calculaꦺtes what actually occurred and the measurable results for the period. Accounting profit has many uses, including for tax declarations. Economic pr♔ofit, on the other hand, is mainly just calculated to help management make a decision.

Accounting Profit vs. Underlying Profit

Companies often choose to supplement accounting profit with their own subjective take on their profit position. One such example is underlying profit. This popular, widely-used metric often excludes 澳洲幸运5开奖号码历史查询:one-time charges or infrequent occurrences and is regularly flagged by management as a key number for investors to pay a👍ttention to.

The goal of underlying profit is to eliminate the impact that random events, such as a natural disaster, have on earnings. Losses or gains that do not regularly crop up, such as 澳洲幸运5开奖号码历史查询:restructuring charges or the buying or sel🔥ling of land or property, are usually not taken into account because they do not occur often and, as a result, are not deemed to reflect the ever🌳yday costs of running the business.

Example of Accounting Profit

Company A operate♎s in the manufacturing industry and sells widgets for $5. In January, it sold 2,000 widgets for a total monthly revenue of $10,000. This is the first number entered into its income statement.

The 澳洲幸运5开奖号码历史查询:cost of goods sold (COGS) is then subtracted from revenue to arrive at gross revenue. If it costs $1 to produce a widget, the ꩵcompany's COGS would be $2,000, and its net sales would be $8,000, or ($10,000 - $2,000).

After calculating the company's gross revenue, all operating costs are subtracted to arrive at the company's operating profit, or earnings before interest, taxes, 澳洲幸运5开奖号码历史查询:depreciation, and 澳洲幸运5开奖号码历史查询:amortization (EBITDA). If the company's only overhead was a monthly employee expense of $5,000, its operating profit would b💝e $3,000, or ($8,000 - $5,000).

Once a company derives its operating profit, it then assesses all 澳洲幸运5开奖号码历史查询:non-operating expenses, such as interest, depreciation, amortization, and taxes. In this example, the company has no debt but has depreciating assets at a 澳洲幸运5开奖号码历史查询:straight line depreciation of $1,000 a month. It also has a co♚rporate tax rate of ♉35%.

The depreciation amount is first subtracted to arrive at the company's earnings before taxes (EBT) of $1,000, or♑ ($2,000 - $1,000). Corporate taxes are then assessed at $350, to give the company an accounting profit of $650, calculated as ($1,000 - ($1,000 * 0.35).