SPONSORED

Accounting Profit Calculator

LAST UPDATE: November 28th, 2024

Profit (from total)
Profit (from average)

Formula

Formula for Accounting Profit (from total)

Accounting Profit = Revenue – Explicit Costs

Where:

  • Total Revenue: The total amount of money a business brings in from selling goods or services.
  • Explicit Costs: These are the out-of-pocket expenses like rent, wages, and utilities.
Formula for Accounting Profit (from averages)

Accounting Profit (from average) = (Average Revenue – Average Cost) x Quantity

Where:

  • Average Revenue is the revenue per unit sold (often this is the price).
  • Average Cost is the cost per unit sold.
  • Quantity is the number of units sold.

Results

Higher profit is considered to be a better result.

How to calculate Accounting Revenue – step by step

Find the profit using the “From Total” method

Step 1 – Find total revenue – the total goods and services the firm sold

Step 2 – Find Explicit Costs – the total costs the firm incurred, including depreciation and amortization. Explicit costs do not include opportunity costs (more detail below in Accounting Profit vs. Economic Profit)

Step 3 – Follow the formula and subtract explicit costs from total revenue

Example

Example: A retail store makes $700,000 in sales during the year. The store’s direct costs are:

  • Wages: $200,000
  • Rent: $50,000
  • Inventory (Goods): $150,000
  • Utilities: $30,000

Step 1: Total revenue = $700,000
Step 2: Explicit costs = $200,000 + $50,000 + $150,000 + $30,000 = $430,000
Step 3: Apply the formula:Accounting Profit=700,000−430,000=270,000Accounting Profit=700,000−430,000=270,000

The accounting profit for this store is $270,000.

Find the profit using the “From Average” method

Step 1 – Find the average revenue (per unit)

Step 2 – Find the average cost (per unit)

Step 3 – Find the quantity sold

Step 4 – Put the above numbers into the calculator or formula – The formula finds the profit per unit and multiplies it by the number of units sold.

Example

From Average – Average Revenue is $100, average costs are $35, and quantity is 400.

Profit (from average) = ($100 – $35) x 400 = $65 x 400 = $26,000

Definition – What is accounting profit?

Accounting profit is the money left over after a business subtracts its direct costs, like rent, wages, and materials, from its total revenue. These direct costs are called explicit costs.

This is different from economic profit, which includes both direct costs and the value of other opportunities the business didn’t pursue (opportunity costs).

Accounting profit is a key figure that businesses report in their financial statements and tax returns. It’s a way to see if the business is making money based on its current expenses and earnings.

Economic Profit vs. Accounting Profit

Accounting profit only subtracts explicit costs, while economic profit also subtracts implicit costs. Implicit costs are the hidden costs or the value of opportunities that were missed.

Here’s a simple breakdown:

  • Accounting Profit = Total Revenue – Explicit Costs
  • Economic Profit = Total Revenue – (Explicit Costs + Implicit Costs)

For example:

  • A bakery owner brings in $250,000 a year in revenue
  • The cost to run the bakery is $100,000 a year
  • The bakery owner could have made $10,000,000 playing professional baseball, but chose to run their own bakery instead.

In accounting profit, the bakery venture’s profit would be $150,000 ($250,000 revenue less $100,000 direct expenses).

In economic profit, the bakery venture’s profit would be a loss of $9,850,000 ($250,000 revenue minus $100,000 expenses minus $10,000,000 opportunity cost of not playing professional baseball).

Businesses typically focus on accounting profit for tax and financial purposes, but economists often look at economic profit to assess whether the business is the best use of resources.

FAQs

Can accounting profit be negative?

Yes, accounting profit is negative when the expenses (money going out) exceeds the revenue (money coming in) of the business.

A negative accounting profit means that your explicit costs are higher than your total revenue. This is a loss, and it indicates that the business is not currently profitable.

What are explicit costs in accounting profit?

Explicit costs are the direct, out-of-pocket expenses a business incurs. These include things like rent, employee wages, materials, utilities, and other day-to-day operating costs.

Why isn’t opportunity cost included in accounting profit?

Accounting profit focuses only on explicit, direct costs that involve actual spending. Opportunity costs, which represent missed opportunities, are not included because they don’t involve actual monetary transactions.

Sources and more resources

  • Khan Academy. (n.d.-b). https://www.khanacademy.org/economics-finance-domain/microeconomics/firm-economic-profit/economic-profit-tutorial/v/economic-profit-vs-accounting-profit
  • jodiecongirl. (2013, November 6). Microeconomics Practice Problem – Accounting Profit versus Economic Profit[Video]. YouTube. https://www.youtube.com/watch?v=tPZS53yC8N0
  • Pindyck, R., & Rubinfeld, D., Microeconomics (8th ed.), (2013). United States of America: Pearson. ISBN 13: 978-0-13-285712-3. Page 301.
  • Nicholson, W., & Snyder, C. Microeconomic Theory – Basic Principles and Extensions (10th ed.). (2008). United States of America: Thomas South-Western. ISBN 13: 978-0-324-42162-0. Page 334.
  • Kacapyr, E., & Redelsheimer, J., & Musgrave, F. Barron’s AP Microeconomics / Macroeconomics (6th ed.). (2018). United States of America: Barron’s. ISBN: 978-1-4380-1065-6. Page 99.
  • Greenlaw, S., & Shapiro, D., Principles of Microeconomics 2e. (2018). Houston: Rice University OpenStax. ISBN 13: 978-1-947172-35-7. Page 157.