Accounting Profit
Candlefocus EditorAccounting profit is typically calculated by subtracting the explicit costs of running the business from the total revenues or income generated. These explicit costs can include the cost of labor, raw materials, and inventory; production costs; and sales and marketing costs. These costs should be accurately recorded in the company’s financial statements in order for accounting profit to be accurately calculated.
Accounting profit differs from economic profit, which takes into account both explicit and implicit costs associated with running the business. This may include such costs as the opportunity cost of using limited resources and the cost of capital. These costs may not be included in the calculation of accounting profit, and they can have a significant impact on the company’s bottom line.
Accounting profit also differs from underlying profit, which is a measure of performance that seeks to eliminate the impact of non-recurring items, such as legal and accounting expenses, merger and acquisition costs, and other extraordinary items. By adjusting these items out of the profit calculation, underlying profit provides a more accurate measure of the company’s performance and financial health.
Ultimately, accounting profit is an important measure of corporate performance, and it should be carefully monitored by key stakeholders in order to ensure proper management of the company’s finances. Understanding the differences between economic, underlying, and accounting profit allows key stakeholders to gain a better insight into their company’s financial health. By accurately assessing their financial performance, companies can be better positioned to make decisions to maximize their profit potential.