Accounting Profit Calculator
The accounting profit calculator is a simple tool that helps you compute the profit of a firm or business from an accounting perspective.
Read further to learn the accounting profit formula, which tells you how to calculate accounting profit. We also prepared a section that helps you understand the difference between accounting vs. economic profit. Now you know you've come to the right place!
What is accounting profit? How to calculate accounting profit?
The best way to understand the concept of accounting profit is to compare the two fundamental methods of defining profit: accounting vs economic profit. Accounting profit is the total incoming money from sales or total revenue, that is, price times quantity sold, minus the total cost of producing the goods or services.
Accounting profits are represented on the firm's income statements, and the accounting department is responsible for reporting this to the manager. Thus, it doesn't include the implicit costs, which are the opportunity costs of giving up the best alternative use of the resource.
This difference is what separates accounting vs. economic profit. The opportunity cost of producing a good or service is generally higher than the accounting costs because it includes both the dollar value of the costs (explicit, or accounting costs) and any implicit costs.
Accounting profit calculator - Accounting profit formula
Now that you are more familiar with the concept of profit from different perspectives, let's discuss how to calculate accounting profit in a more precise way. Accounting profit, also known as bookkeeping profit or financial profit, is the net income earned after deducting all costs from the total revenue. In other words, it represents the amount of money a firm has left over after paying all the explicit costs of running the business.
In this calculator, we use four types of cost which make up the total explicit costs:
- Operation expenses: for example, wages, inventory, sales and marketing costs;
- Interest: paid interest after taking a loan for the investment;
- Depreciation: a reduction in the value of an asset over time; and
- Taxes: for example corporate tax.
Therefore, the accounting profit formula is the following:
accounting profit = total revenue - total explicit costs
total explicit costs = operation expenses + interest + depreciation + taxes
Accounting vs. economic profit - an example
Let's demonstrate the difference between explicit and implicit costs through a simple example. Let's say you own a property on which you are considering opening a small pizzeria. After a detailed analysis, you estimate that your business would make 100,000 dollars in annual revenue, and you would need 30,000 dollars to cover the food supplies and electricity for the year.
Since you're planning to run the business on your own, your total explicit cost would be just the 30,000 dollars, which means that you expect the accounting profit to be
$100,000 - $30,000 = $70,000. It would help if you didn't stop the analysis there, however - since you only considered the accounting cost of opening your pizzeria, the accounting profit overstates your economic profit.
First, explicit costs don't include the time you spend running the business. Had you not run the business, you could have earned, for example, 40,000 dollars by keeping your current job. Second, another opportunity cost of setting up your business is the best alternative use of your property, which is, let's say, renting it out to someone else. In this way, you could earn, say 80,000 dollars in a year. Therefore, the economic cost of setting up the pizzeria is not only the 30,000 explicit cost but also the explicit cost of
$40,000 + $80,000 = $120,000. Thus, the total opportunity cost (explicit and implicit) already exceeds the total expected revenue
$30,000 + $120,000 = $150,000, which is much higher than your accounting cost would be and makes your business plan unprofitable from an economic point of view. But your love of pizza is, well, priceless.