Accounting Profit: What It Is and How to Calculate It
Learn what accounting profit is, how it’s calculated, and why it matters for businesses.
![[Featured Image] Two accountants discuss accounting profit in an office.](https://d3njjcbhbojbot.cloudfront.net/api/utilities/v1/imageproxy/https://images.ctfassets.net/wp1lcwdav1p1/3PJLkWRsLCpp0ym4FG2Xvu/c901c46c41415262336a753b86401192/GettyImages-664647705__1_.jpg?w=1500&h=680&q=60&fit=fill&f=faces&fm=jpg&fl=progressive&auto=format%2Ccompress&dpr=1&w=1000&h=)
What is accounting profit?
Accounting profit, also referred to as financial profit or bookkeeping profit, is a company’s net income, or total revenue minus explicit costs. Accounting profit is used to assess a company’s performance and compare its financial position to competitors.
Accounting profit vs. economic profit
Another term you might come across when researching accounting profit is economic profit. Economic profit is a company’s net income minus explicit and opportunity costs. The purpose of calculating economic profit is to help businesses make sound financial decisions about the kinds of opportunities they want to invest in.
Explore the similarities and differences between these two concepts in the terms and table below:
Explicit costs: refer to the trackable, quantifiable costs of raw materials, employee wages, and other expenses
Implicit costs: refer to a type of opportunity cost and relate to ideas or decisions, rather than physical items, such as when a company makes a decision that reduces its potential income. For example, when hiring a new employee, there is the explicit cost of paying wages, as well as an implicit cost of the time it takes a hiring manager or leader to interview and onboard the employee.
Opportunity costs: represent the potential benefits that a company foregoes when choosing one option over its alternatives. An example of an opportunity cost could be choosing to invest in expensive equipment over cheaper alternatives, if the perceived value and benefits of the expensive equipment are higher.
Cost of goods sold (COGS): refers to the cost of producing goods or services. COGS can include materials, labor, software, distribution, etc.
Economic principles: common theories on what influences economic and market activity
Generally accepted accounting principles (GAAP): refers to guidelines that keep accounting practices consistent and comprehensible across industries, individual companies, and spans of time
| Accounting profit | Economic profit |
|---|---|
| Calculates only explicit costs | Calculates explicit costs, implicit costs, and opportunity costs |
| = Total revenue - explicit costs | = Total revenue - (explicit + opportunity costs) |
| Based on generally accepted accounting principles | Based on economic principles and market activity |
| Factors in only actual, concrete financials | Factors in assumptions and estimates |
| Reported to the IRS | Not reported to the IRS |
Why is accounting profit important?
Now that you have a clear accounting profit definition, the next step is to understand why it’s important. Profit is a crucial metric for measuring the health and performance of a company. If your company is profitable, it may stand a greater chance of surviving in the long term.
Knowing your company’s accounting profit can make it easier to plan for its financial future. For example, if one of your products has a low product margin, meaning that the selling price for one unit isn’t much higher than the cost of producing it, then you might consider reducing costs or raising the price.
In addition, knowing your accounting profit is useful for measuring your company’s performance against your competitors so that you have an idea of where you stand in your niche.
Read more: What Is Competitor Analysis? Definition + Step-by-Step Guide
How to calculate accounting profit
Calculating accounting profit is a fairly simple process and should be a regular part of your business strategy. You may find it useful to keep track of earnings and costs on a spreadsheet or with accounting software.
![[Image] An infographic explains how to calculate accounting profit by subtracting explicit costs from revenue.](https://images.ctfassets.net/wp1lcwdav1p1/52F3JVtmqdiGUa2odFrgVQ/7ff80b1ca1993f27ae7cedeea3bd44c7/20337_--_calculating_accounting_profit_.png?w=1500&q=60)
Use the steps below as a guide to calculate accounting profit.
1. Determine total revenue.
Select a time period to measure your company’s total earnings such as monthly, quarterly, or yearly. Add up the income from every revenue stream.
2. Determine explicit costs.
Account for all of your explicit costs—everything that is an expense related to operating your business—and come up with a total. Explicit costs might include:
Software subscriptions
Physical equipment or supplies
Contractor and employee compensation
Facility or building rental
Commercial real estate mortgage
Professional membership fees
3. Subtract costs from revenue.
Once you have figures for both the total revenue and explicit costs, simply subtract costs from revenue, and you’ll know your accounting profit.
Refer to this accounting profit formula on a regular basis to know where your business stands: accounting profit = total revenue - explicit costs
Learn accounting with Coursera.
Taking online courses can be a great way to build skills and knowledge in accounting and explore career opportunities, whether you want to start your own business or find your dream job with an employer.
Explore these options:
specialization
Introduction to Finance and Accounting
Learn the basics of finance and accounting. Build a foundation of core business skills in finance and accounting
4.4
BEGINNER level
Average time: 5 month(s)
Learn at your own pace
Skills you'll build:
Corporate Finance, Financial Accounting, Financial Statement, Accounting, Decision-Making, Discounted Cash Flow, Cash Flow Analysis, Balance Sheet, Generally Accepted Accounting Principles, Accounting Terminology
professional certificate
Intuit Academy Bookkeeping
Launch your career in bookkeeping. Gain the professional skills you need to succeed in the bookkeeping field. No degree or prior experience required.
4.5
BEGINNER level
Average time: 4 month(s)
Learn at your own pace
Skills you'll build:
Double-Entry Bookkeeping System, Bookkeeping, Bank Reconciliations, Accounting Concepts and Measurement, Basis Of Accounting, accounting software, Accounting Cycle, Creating Financial Statements, Accounts receivable and cash receipts, Inventory costing methods, PP&E Accounting, Asset Accounting, Depreciation, Accounts Payable and Payroll, Owner’s Equity and Owner’s Draw, Accounting, Long-Term Liabilities and Note Payable, Accounting for Liabilities and Equity, Cash Flow, Bank Reconciliation, Financial reports analysis, financial statement analysis
Related articles
This content has been made available for informational purposes only. Learners are advised to conduct additional research to ensure that courses and other credentials pursued meet their personal, professional, and financial goals.
Coursera Footer
