
Accounting Profit
Accounting profit is a company's total earnings, calculated according to generally accepted accounting principles (GAAP). The costs that need to be considered include the following: Labor, such as wages Inventory needed for production Raw materials Transportation costs Sales and marketing costs Production costs and overhead Like accounting profit, economic profit deducts explicit costs from revenue. Accounting profit, also referred to as bookkeeping profit or financial profit, is net income earned after subtracting all dollar costs from total revenue. Where they differ is that economic profit also uses implicit costs; the various opportunity costs a company incurs when allocating resources elsewhere. Examples of implicit costs include: Company-owned buildings Plant and equipment Self-employment resources 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, depreciation, and amortization (EBITDA).

What Is Accounting Profit?
Accounting profit is a company's total earnings, calculated according to generally accepted accounting principles (GAAP). It includes the 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 used to evaluate the health of a company.
Firms often publish various versions of profit in their 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 accountants.
Accounting profit, also referred to as bookkeeping profit or financial profit, is net income earned after subtracting all dollar costs from total 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 following:
Accounting Profit vs. Economic Profit
Like accounting profit, economic profit deducts explicit costs from revenue. Where they differ is that economic profit also uses implicit costs; the various opportunity costs a company incurs when allocating resources elsewhere.
Examples of implicit costs include:
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. Economic profit, however, would add implicit costs, such as the 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 economic 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 calculates what actually occurred and the measurable results for the period. Accounting profit has many uses, including for tax declarations. Economic profit, 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 one-time charges or infrequent occurrences and is regularly flagged by management as a key number for investors to pay attention 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 restructuring charges or the buying or selling 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 everyday costs of running the business.
Example of Accounting Profit
Company A operates 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 cost of goods sold (COGS) is then subtracted from revenue to arrive at gross revenue. If it costs $1 to produce a widget, the company's COGS would be $2,000, and its gross revenue 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, depreciation, and amortization (EBITDA). If the company's only overhead was a monthly employee expense of $5,000, its operating profit would be $3,000, or ($8,000 - $5,000).
Once a company derives its operating profit, it then assesses all non-operating expenses, such as interest, depreciation, amortization, and taxes. In this example, the company has no debt but has depreciating assets at a straight line depreciation of $1,000 a month. It also has a corporate 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).
Related terms:
Accounting Earnings
Accounting earnings is the profit a company reports on its income statement and is calculated by subtracting the cost of doing business from revenue. read more
Amortization : Formula & Calculation
Amortization is an accounting technique used to periodically lower the book value of a loan or intangible asset over a set period of time. read more
Cost of Goods Sold – COGS
Cost of goods sold (COGS) is defined as the direct costs attributable to the production of the goods sold in a company. read more
Depreciation
Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account for declines in value over time. read more
Earnings
A company's earnings are its after-tax net income, meaning its profits. Earnings are the main determinant of a public company's share price. read more
What is EBITDA - Formula, Calculation, and Use Cases
EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company's overall financial performance. read more
Earnings Before Tax (EBT)
Earnings before tax (EBT), calculated as revenue minus expenses excluding taxes, measures a company's financial performance. read more
Economic Profit (or Loss)
Economic profit (or loss) is the difference between the revenue received from the sale of an output and the costs of all inputs, including opportunity costs. read more
Explicit Cost
Explicit costs are normal business expenses that appear in the general ledger and directly affect a company's profitability. read more