Glossary – Accounting Profit

Definition

A company’s total revenue minus its total explicit costs.

Example

Assume a carpenter produces 1’000 chairs, which he then sells at a price of $100 each. His total revenue will add up to $100’000. If he faces total costs of $60’000, accounting profit will amount to $40’000 ($100’000 – $60’000).

Relevance

As the name suggests accounting profit is an essential part of accounting. It is used to provide a true and fair view of the results of a company’s operations. However it is important to note that accounting profit does not include implicit costs (such as opportunity costs), as a result it is usually a bit higher than economic profit.

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