Definition – What is accounting profit?
Accounting profit is a method of calculating profit using explicit costs (where money changes hands).
For example, if a building is purchased for $100,000, and the next year would be worth $200,000 (but not sold) there is no increase in profit as there is no explicit transaction.
Accounting profit is typically used for tax calculations.
Formula – How to calculate accounting profit
Accounting Profit = Revenue – Explicit Costs
A business has revenue of $500,000 and explicit costs of $300,000
Accounting Profit = $500,000 – $300,000 = $200,000
Therefore, the accounting profit is $200,000.
Sources and more resources
- Wikipedia – Profit (accounting) – A description of profit in the accounting sense.
- Khan Academy – Economic profit vs. accounting profit – Part of a larger course on microeconomics. This video details the differences between accounting and economic profit and how they are calculated.
- Investopedia – What is the difference between accounting and economic profit? – Another comparison of economic and accounting profit.
- jodiecongirl (YouTube) – Microeconomics practice problem – Accounting Profit versus Economic Profit – A video overviewing the difference between accounting and economic profit.