Accounting Profit

Accounting Profit refers to the total Revenue of a company minus the explicit costs incurred in earning that Revenue. Explicit costs are direct, out-of-pocket expenses such as wages, rent, and materials. Accounting profit is used in financial statements and reflects the profitability of a company over a specific period.

Example 1: If a company generates $500,000 in sales Revenue and incurs $300,000 in explicit costs, the accounting profit would be:

Accounting Profit = Total Revenue – Explicit Costs = $500,000 – $300,000 = $200,000

Example 2: A bakery sells pastries for $50,000 and has costs of $30,000 for ingredients, $10,000 for wages, and $5,000 for rent. The accounting profit is calculated as follows:

Accounting Profit = $50,000 – ($30,000 + $10,000 + $5,000) = $50,000 – $45,000 = $5,000

Case: A tech startup invests $200,000 in a new product and generates $600,000 in sales. The explicit costs, including salaries and materials, amount to $400,000. The accounting profit is:

Accounting Profit = $600,000 – $400,000 = $200,000