Accounting Profit

Published Dec 23, 2022

Definition of Accounting Profit

Accounting Profit is defined as total revenue minus total explicit costs. That means it only considers costs that reduce the account balance, such as variable costs and fixed costs. It does not take into account any implicit costs, such as opportunity costs.

Example

To illustrate this, let’s look at an imaginary ice cream seller called John. On a sunny day, John sells 200 ice cream cones for USD 2.00 each. Thus, his revenue for that day is USD 400.00 (i.e., 200*2). Meanwhile, the ingredients to produce 200 cones add up to USD 150.00 (i.e., variable cost). In addition, John has to pay USD 50.00 per day to rent his ice cream truck (i.e., fixed cost). As a result, John’s explicit costs add up to USD 200.00, and his accounting profit is USD 200.00 (i.e., 400 – 200).

Why Accounting Profit Matters

Accounting profit is an important concept for understanding the financial performance of a business. It shows how much money a business is making after all its expenses have been taken into account. This is important for investors, as it helps them to assess the potential return on their investment. It is also important for businesses, as it helps them to determine whether they are making enough money to stay in business.