Live Chat Now
Give us a call

Send us a text



What Is Accounting Profit?

By DeVry University

The information presented here is true and accurate as of the date of publication. DeVry’s programmatic offerings and their accreditations are subject to change. Please refer to the current academic catalog for details.


December 22, 2021

4 min read

Accounting profit is a widely used metric that helps accountants identify a company’s net profit, or earnings after explicit costs such as labor, raw materials, production and marketing are subtracted from its total income. Accounting profit represents actual profit, rather than the more theoretical calculations of economic profit.


Accounting profit paints a clearer picture of how a company is doing and how financially sustainable its operations are. With this number, accountants are able to determine whether a business is growing or if it’s losing money, and how quickly its profits are increasing or decreasing compared to a previous accounting period, such as a fiscal quarter or year.


In this article, we'll dive deeper into what accounting profit is by comparing it with the concept of economic profit. We’ll also go over how to calculate accounting profit and look at a few real-world scenarios for its use as we explore the following sections:


What Is Economic Profit?

The economic profit of a company reflects economic principles more than accounting principles. Like accounting profit, economic profit deducts the costs of operation from total revenue, but unlike accounting profit, it also considers the opportunity cost of certain actions to determine whether or not the most profitable route was chosen.

Part of how economic profit works is the introduction of what is known as implicit costs. Implicit costs are the cost of a company's resources. While this concept also exists in accounting, the economic model for profit factors in alternative uses of these implicit costs.

As an example, let's say you work for a company that creates construction materials such as concrete. In order to make concrete, your company owns a section of desert where sand is harvested that you then sell to contractors to make the concrete. In this example, your implicit cost is the sand, which you sell raw to another company that makes concrete rather than using it to make concrete yourself.

In more abstract examples, such as those that may exist at major corporations, implicit costs are applied to the projects that you choose, or do not choose, to undertake. For example, if you choose to work with Client 1 rather than Client 2 on a particular project, your economic profit will reflect how much more revenue would have been generated had you chosen to work with Client 2.

Accounting Profit vs. Economic Profit

Accounting profit is only concerned with actions that happened and ignores actions that did not take place but could have. Economic profit, on the other hand, incorporates those theoretical actions.

Generally, companies will use both types of profit calculations to get a complete assessment of their organization’s health. For instance, if economic profit and accounting profit are both weak, then management may be able to determine that there are flaws in their decision-making process that can be re-evaluated. On the other hand, if accounting profits are bad while economic profits indicate that the correct decisions surrounding implicit costs were made, the company may be in trouble from an operational standpoint.

It's important for accountants and businesspeople to understand the implications of each profit model so that they can ensure the company is using its resources effectively at any given time.

How To Calculate Accounting Profit

The equation used to calculate accounting profit is relatively simple, especially when compared to the more theoretical economic profit model. Accounting profit is calculated using the following formula:

Accounting profit = total revenue – total costs

Of course, to get all of the numbers that you need in order to calculate the accounting profit of an organization, you need to carefully track information over a predetermined time period and perform several other additional calculations to get each individual variable.

Accounting Profit Examples

Let's take a look at an example of how accounting profit plays out when using actual numbers for each variable:

Company A produces iron used in construction. Over the course of the year, they were able to generate revenue of $1.5 million by spending $1 million on all the costs associated with the generation of their product. As you can see from this example, Company A managed to generate an accounting profit of $500,000, which is worked out below:

$1,500,000 - $1,000,000 = $500,000

Prepare To Pursue an Accounting Career With DeVry

If you're interested in learning more about accounting or are thinking about pursuing an accounting career, we can help. Explore our various accounting degree programs taught by experienced faculty, which can help you gain insight into the industry, learn concepts such as accounting profit or recognize the difference between finance and accounting. Our online programs can help you balance your commitment to education with work, family and other elements of your busy life. Classes start every 8 weeks. 


8-Week Class Sessions

Classes Start Every 8 Weeks

Filter Blog Post Category

Related Posts