Frequently Asked Questions
Explicit costs are the direct costs incurred in the production and sale of goods or services. These costs include labor, raw materials, transportation, marketing, and overhead expenses.
Accounting profit is the difference between a company’s total revenue and its explicit costs. Net profit, on the other hand, is the profit remaining after all expenses, including both explicit and implicit costs, as well as taxes, have been deducted from the total revenue.
Accounting profit is one metric for assessing a company’s profitability after considering explicit costs. It can help in understanding the company’s financial health and how well it manages its expenses. However, it’s essential to consider other financial metrics like economic profit, net profit margin, and return on investment for a comprehensive evaluation of a company’s performance.
Differentiating between accounting profit and economic profit is essential because each metric serves a different purpose. Accounting profit focuses on explicit costs only and helps assess the company’s financial health after considering these costs. Economic profit, on the other hand, takes into account both explicit and implicit costs, providing a more comprehensive view of the company’s profitability and overall performance. This distinction helps in making better-informed decisions about the company’s operations and investments.
A company should calculate its accounting profit regularly, typically on a quarterly or annual basis. Regularly monitoring the accounting profit helps businesses track their financial performance, identify trends, and make timely decisions to improve profitability or address potential issues.
Enter the total revenue of a company and its explicit costs into the calculator. The calculator will evaluate and display the accounting profit of that company.
Accounting Profit Formula
The following equation can be used to calculate the accounting profit of any business or company.
AP = R – EC
EC = OE + I + D + T
- Where AP is accounting profit ($)
- R is the revenue ($)
- EC is the explicit costs ($)
- OE is operating expenses ($)
- I is interest expense ($)
- D is depreciation ($)
- T is taxes ($)
Accounting Profit Definition
Accounting profit is the total revenue minus the explicit costs by definition. As for applicable uses, it's one metric for how profitable a company is after expenses. It takes into account explicit costs only and not extraneous costs.
Can accounting profits be negative?
Accounting profits can be negative if the explicit costs of producing a good or service end up being larger than the revenue generated. In this case, the product or business is failing to be profitable, and changes will need to be made to save the business. In early-stage companies, this often happens many quarters as they scale production.
Accounting Profit vs. Economic Profit
An accounting profit is a difference between revenue and explicit costs. An economic profit is a difference between revenue and both explicit and implicit costs.
Explicit costs include every cost that goes into the production and sale of a good including:
- Labor
- Raw material
- Transportation
- Marketing
- Overhead
Implicit costs are those costs that have already occurred but are required to make the product. This includes:
- Owned Buildings
- Equipment and production plants
- Other resources
- Self-Employment opportunity cost
Can accounting profit equal economic profit?
An accounting profit will equal economic profit if there are no implicit costs associated with a business. This does not often occur, but can be the case especially for SAAS business that have no owned building or other implicit costs.
Accounting Profit Example
How to calculate accounting profit?
- First, determine the total revenue.
Measure the total revenue earned by the business or segment. For this example, the business is found to have generated a total of $10,000.00 in revenue.
- Next, determine the explicit costs.
Measure the explicit costs associated with the revenue. The company found that it had costs of; $5,000.00 in operating expenses, $500.00 in taxes, $400.00 in depreciation, and $200.00 in interest expense.
- Finally, calculate the accounting profit.
Calculate the accounting profit using the formula above. The company find that the accounting profit was 10,000- (5,000+500+400+200) = $3,900.00.
