accounting profit

Examples of accounting profit in the following topics:

• Difference Between Economic and Accounting Profit

  • The accounting profit would be $40,000 ($100,000 in revenue - $60,000 in explicit costs).
  • In general, profit is the difference between costs and revenue, but there is a difference between accounting profit and economic profit.
  • The biggest difference between accounting and economic profit is that economic profit reflects explicit and implicit costs, while accounting profit considers only explicit costs.
  • Accounting profit is also limited in its time scope; generally, accounting profit only considers the costs and revenue of a single period of time, such as a fiscal quarter or year.
  • Economic profit also accounts for a longer span of time than accounting profit.

• Sources and Determinants of Profit

  • Consequently, the firm earns $25,000 in economic profit.
  • In contrast, accounting profit is the difference between total revenue and explicit costs- it does not take opportunity costs into consideration, and is generally higher than economic profit.
  • Economic profits may be positive, zero, or negative.
  • An economic profit of zero is also known as a normal profit.
  • Despite earning an economic profit of zero, the firm may still be earning a positive accounting profit.

• Expense Recognition

  • Expense recognition is an essential element in accounting because it helps define how profitable a business is in an accounting period.
  • In terms of the accounting equation, expenses reduce owners' equity.
  • The expenditure offsets the income the business earned and is used to calculate the business's profit.
  • By shifting the timing of when expenses are recognized, a company can artificially make its business appear more profitable.
  • Generally, cash basis accounting is reserved for tax accounting, not for financial reports.

• Cost of Goods Sold and Gross Profit

  • Gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service.
  • In accounting, gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service before deducting overhead, payroll, taxation, and interest payments.
  • Note that this is different from operating profit (earnings before interest and taxes).
  • Net income (or Net profit) = Operating profit – taxes – interest
  • Explain the difference between cost of goods sold and gross profit

• Net Income

  • Net income in accounting is an entity's income minus expenses for an accounting period.
  • Net income in accounting is an entity's income minus expenses for an accounting period.
  • Net income is a distinct accounting concept from profit.
  • Profit is a term that means different things to different people, and different line items in a financial statement may carry the term "profit," such as gross profit and profit before tax.
  • In contrast, net income is a precisely defined term in accounting.

• Fundamental Concepts in Accounting

  • In order to prepare the financial statements, it is important to adhere to certain fundamental accounting concepts.
  • The objectives of financial reporting, as discussed in the Financial Accounting standards Board (FASB) Statement of Financial Accounting Concepts No. 1, are to provide information that
  • Prudence, if there are two acceptable accounting procedures choose the one gives the less optimistic view of profitability and asset values.
  • Money Measurement, accounts only deal with items to which monetary values can be attributed.
  • This is a diagram of details for principles, concepts, and constraints within the field of Financial Accounting.

• Tax Accounting

  • Tax accounting couples legal obligations with financial accounting to ensure adherence to current tax laws.
  • As a result, the primary role of a tax accountant is to understand the business' current operating status, distill profitability before tax, and report earnings.
  • Some exceptions exist, of course, such as non-profit organizations.
  • Non-profits have unique tax preparation requirements due to their no-tax status.
  • This image demonstrates the various responsibilities and perspectives of different forms of accounting (those being tax accounting, managerial accounting and financial accounting).

• Importance of Cash Flow Accounting

  • It is usually measured during a specified, finite period of time, or accounting period.
  • Being profitable does not necessarily mean being liquid.
  • A company can fail because of a shortage of cash even when it is profitable.
  • Cash flow is often used as an alternative measure of a company's profitability when it is believed that accrual accounting concepts do not represent economic realities.
  • For example, a company may be profitable but generate little operational cash (as may be the case for a company that barters its products rather than selling for cash or when its accounts receivable turnover is long).

• Gross Profit Method

  • The gross profit method uses the previous year's average gross profit margin to calculate the value of the inventory.
  • A company will chose an inventory accounting system, either perpetual or periodic.
  • In perpetual inventory the accounting records must show the amount of inventory on hand at all times.
  • Determine the gross profit ratio.
  • Gross profit ratio equals gross profit divided by sales.

• Profitability Ratios

  • Profitability ratios show how much profit the company takes in for every dollar of sales or revenues.
  • Profit Margin: The profit margin is one of the most used profitability ratios.
  • The profit margin refers to the amount of profit that a company earns through sales.
  • The higher the profit margin, the more profit a company earns on each sale.
  • Gross Profit Ratio: This indicates what portion of each sales dollar is available to meet expenses and generate profit after taking into account the cost of goods sold.