If you run a business or company and want to estimate its profit from a perspective of accounting, then this calculator is right for you! This handy tool allows you to quickly calculate the accounting profit. That can help you find out whether your business is profitable and go from there. This is a good starting point for planning how to make it more profitable.
In this article, you can learn how to compute your accounting profit using the accounting profit formula. You can also find out more about economic and accounting profit, and discover the main differences between them. That’s not all! We will shed some light on the accounting profit calculation that makes it easy to determine the costs of operation for every type of business. Let’s get started, shall we?
Accounting Profit: What Is It?
Accounting profit (also called financial profit or bookkeeping profit) is the difference between a company’s accounting revenue and its accounting expenses. This value represents all the incomes from total revenue and/or sale. It’s calculated this way: quantity sold times price minus expenses of producing the services or goods. In other words, you need to deduct all expenses from your total revenue.
Accounting profit is a measure of how much money a company has made after deducting all expenses. This can be calculated by subtracting total costs from total revenue. Accounting revenue refers to the total of all income that a company receives from its customers, including cash, credit card payments, and bank transfers. Accounting expenses refer to the total of all money spent by a company on wages, rent, utilities, supplies, etc.
Revenue is an important factor in accounting because it tells you how much money your company has made in a given time period, such as one year or one month. Revenue is also called turnover, and it’s usually listed on the income statement as net sales, gross sales, or net income.
Costs are expenses that are incurred during production to create goods or services for customers to buy. A company’s cost of goods sold (COGS) includes all costs that go into producing its products, including materials and labor costs.
So, it doesn’t include total explicit costs. Where can you find the accounting profit of a business? Check the company’s income statements. By the way, the managers should regularly get reports from the local accounting department.
Accounting Profit Formula
It’s time to check how to calculate the accounting profit of a firm. If you want to calculate it by yourself (we recommend using our calculator), use the formula below.
AP = Total Revenue – (Operation Expenses + Interest + Depreciation + Taxes)
The sum of Operation Expenses, Interest, Depreciation, and Taxes is regarded as the total explicit costs, meaning it consists of four kinds of costs. So, the Accounting Profit of a company is as follows:
AP = Total revenue – Total explicit costs
Now that you know how to calculate accounting profit without our calculator, let’s explain each component of this formula.
- Total revenue – The total revenue of a company is the sum of all income generated during a certain period. It can be calculated by adding up the gross income and subtracting the cost. The gross income is the amount that was generated before any deductions are made. The cost refers to any expenses incurred during this time period and includes things like salaries, taxes, and interest payments.
- Operation expenses – The operation expenses of a company can be classified into fixed and variable costs. Fixed costs are those that do not change with the level of production or sales. Variable costs are those that change with the level of production or sales. Examples of fixed costs include rent, insurance, salaries, and so on. You should also take into account marketing costs and inventory. Examples of variable costs include raw materials used in production and transportation expenses incurred to get products to market.
- Interest – Interest is the fee paid by a borrower to a lender for lending money after getting a loan. This is the money used for the investment. It can be calculated in different ways, and it is usually expressed as an annual percentage of the loan. The interest rate on a loan depends on many factors including:
-The length of time for which the loan will be taken out;
-The amount that will be borrowed;
– The credit history and credit score of the individual who is borrowing;
– The current interest rates that are available in general; and
– The type of loan being applied for (e.g., mortgage, car loan, personal loan).
- Depreciation – This will tell you how much the value of your assets is going to reduce over time. The depreciation method is a process of allocating the cost to expense over the time period in which the asset is used. It’s not just about taking money off of taxes, it’s about spreading out the cost of an asset over its lifespan so that it doesn’t impact your company’s cash flow and you can have a more accurate picture of your financial health.
- Taxes – Taxes are an important part of any business. The amount of taxes you owe depends on the type of business you run and your country’s tax laws. There are a variety of taxes, including corporate tax. Some countries have a progressive tax system, which means that the percentage of taxes owed increases as income increases. Others have a proportional tax system, which means that the percentage of taxes owed remains constant regardless of income level.
Example: - Total Revenue: $100,000
- Operation Expenses: $25,000
- Interest Paid: $12,000
- Depreciation: $10,000
- Taxes: $15,000
- Accounting Profit (AP) = $100,000 – $62,000 = $38,000
What’s the Difference Between Economic and Accounting Profit?
We will take an example to help you understand the difference between implicit and explicit costs. Let’s say you operate a business that enables you to earn $120,000 per year (your annual revenue). And let’s assume you need $50,000/year to pay for electricity and supplies. This is actually your total explicit cost, whereas your accounting profit is as follows: $120,000 – $50,000 = $70,000.
Note that it doesn’t include the time spent on operating the business. Instead, you could have made $35,000 a year, for example, by doing your existing job. Besides, you could have rented your property and earned $55,000 in a year.
Thus, the economic cost of running a business isn’t just the 50,000 explicit cost but it also covers the explicit cost of $35,000 + $55,000 = $90,000. So, the total opportunity cost (both implicit and explicit) would exceed the total expected revenue $50,000 + $90,000 = $140,000. This means your business is not profitable in terms of economic profit.