Accounting Profit: What It Is, How to Calculate It, and Key Differences
Updated on Dec 24, 2024 | 7 min read | 1.5k views
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Updated on Dec 24, 2024 | 7 min read | 1.5k views
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Imagine you run a bakery earning INR 1L in sales, with total costs (ingredients, rent, utilities, etc.) adding up to INR 70K. Your accounting profit is INR 30K—simple, right?
But here’s the catch: Are you factoring in hidden costs like depreciation? Do you understand how accounting profit differs from economic profit or cash flow? And more importantly, are you using this data effectively to make strategic decisions?
Missteps can lead to flawed financial strategies or missed opportunities for growth. In this blog, you’ll dive into the details and uncover how accounting profit works, where it fits, and why it matters. Ready? Dive in!
Accounting profit is the difference between a company’s total revenue and its explicit costs. It measures a business’s financial performance, excluding opportunity costs.
Here are the key elements of accounting profit:
Accounting profit appears in the income statement and reflects a company's operational success. It’s used for assessing profitability, determining taxes, and making business decisions.
The following reasons are why it’s important:
If you want to build deeper expertise in evaluating the financial performance of a business, check out upGrad’s Financial Analysis Course.
Also Read: Tools of Financial Statement Analysis: Objectives, Techniques, Types
Understanding what is accounting profit isn’t enough; you also need to know how to calculate accounting profit accurately. Let’s break it down step-by-step.
Calculating accounting profit is straightforward. It involves subtracting explicit costs from total revenue. Follow these simple steps to calculate your business’s accounting profit.
Total revenue is the total money earned from selling goods or services. This includes all income streams your business generates, such as:
Total Revenue Example: INR 7L for the month.
Also Read: Purpose of Financial Accounting: Function, Importance, Principles
Explicit costs are the direct, out-of-pocket expenses necessary to operate your business. These typically include:
Example Total Explicit Costs: INR 45K for the month.
Now that you have both total revenue and explicit costs, subtract the total explicit costs from the total revenue to find your accounting profit.
This is called the accounting profit formula.
You can use this formula to calculate accounting profit.
Accounting Profit = Total Revenue - Explicit Costs
Example:
If you want to deepen your understanding of modern financial systems and stay ahead in your career, explore upGrad’s Introduction to Digital Banking Course.
Also Read: Finance vs Accounting: Which One Should You Choose?
While accounting profit is crucial, it’s not the only measure of a company’s success. Comparing it to economic profit reveals a broader picture of profitability.
While both accounting profit vs economic profit measure a company's financial success, they differ in how they account for costs. Understanding these differences between accounting profit vs economic profit is crucial for businesses and investors when making financial decisions.
Accounting profit vs economic profit have different criteria. To understand the differences between the two, refer this below table:
Criteria |
Accounting Profit |
Economic Profit |
Definition | Total revenue minus explicit costs. | Total revenue minus both explicit and implicit costs. |
Costs Considered | Only explicit costs (e.g., wages, rent). | Both explicit costs and implicit (opportunity) costs. |
Purpose | Measures financial performance for taxation and reporting. | Provides a more comprehensive view of a company’s profitability, considering all resource usage. |
Implication | Tells whether a company is financially viable based on operational expenses. | Tells whether a company is truly maximizing its resources and making the best decisions. |
Example | Revenue = INR 1L, Explicit Costs = INR 60K → Accounting Profit = INR 40K | Revenue = INR 1L, Explicit Costs = INR 60K, Implicit Costs = INR 20K → Economic Profit = INR 20K |
Also Read: Financial Accounting vs. Management Accounting: A Comprehensive Guide
To gain a well-rounded understanding of financial performance, it's important to compare accounting profit with other profit metrics. Each metric serves a different purpose in evaluating business health.
1. Accounting Profit vs. Underlying Profit
2. Accounting Profit vs. Cash Profit
3. Accounting Profit vs. Taxable Profit
Also Read: Top 10 Skills Required for Finance and Accounting
Whether you’re a student, entrepreneur, or finance professional, mastering these concepts can boost your career. Here’s how upGrad can help you get there.
upGrad offers a comprehensive approach to help you build and refine your skills in accounting. Through their specialized programs, you can gain technical knowledge, hands-on experience, and 100+ free courses. Join over 1 million learners to build job-ready skills and tackle industry challenges.
Here are some relevant courses you can check out:
Course Title |
Description |
Master’s Degree in International Accounting and Finance | Build a successful career in international accounting and finance with a PwC Academy certification. |
Accounting Fundamentals | Learn about financial statements, how to interpret them, and make business decisions based on financial data. |
Professional Certificate Program in Financial Modelling and Analysis | Transform your professional journey in finance with live training from PwC India and top finance experts. |
LL.M. in Corporate and Financial Law | In-depth knowledge of corporate transactions, financial markets, and regulatory frameworks. |
You can also get personalized career counseling with upGrad to shape your career, or visit your nearest upGrad center and start hands-on training today!
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