Accounting Rate of Return - ARR

AAA

DEFINITION of 'Accounting Rate of Return - ARR'

The amount of profit, or return, that an individual can expect based on an investment made. Accounting rate of return divides the average profit by the initial investment in order to get the ratio or return that can be expected. This allows an investor or business owner to easily compare the profit potential for projects, products and investments.

INVESTOPEDIA EXPLAINS 'Accounting Rate of Return - ARR'

ARR is considered a straight-line method of gathering quantitative information. While this is a positive measure in some aspects, its lack of sophistication is also a drawback. ARR does not consider the time value of money, which means that returns taken in during later years may be worth less than those taken in now, and does not consider cash flows, which can be an integral part of maintaining a business.

VIDEO

Loading the player...
RELATED TERMS
  1. Time Value of Money - TVM

    The idea that money available at the present time is worth more ...
  2. Profit

    A financial benefit that is realized when the amount of revenue ...
  3. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  4. Future Value - FV

    The value of an asset or cash at a specified date in the future ...
  5. Present Value - PV

    The current worth of a future sum of money or stream of cash ...
  6. Cash Flow

    1. A revenue or expense stream that changes a cash account over ...
RELATED FAQS
  1. Given a good bookkeeping system, would financial accounting be necessary?

    Bookkeeping and financial accounting may seem like they are new creations, but variations have been around for millennia. ... Read Full Answer >>
  2. What is the difference between principles-based accounting and rules-based accounting?

    Almost all companies are required to prepare their financial statements as set out by the Financial Accounting Standards ... Read Full Answer >>
  3. How does a contra-asset account differ from a contra-liability account?

    A contra-asset account is an asset account with a credit balance and reduces the total assets on a company's balance sheet, ... Read Full Answer >>
  4. How are Net Credit Purchases calculated in the accounts payable turnover ratio?

    The accounts payable turnover ratio treats net credit purchases as equal to cost of goods sold (COGS) plus ending inventory, ... Read Full Answer >>
  5. How can the problem of asymmetric information be overcome?

    Asymmetric information is inherent in most, if not all, markets. To take a basic example, a patient admitted to a hospital ... Read Full Answer >>
  6. What is the difference between carrying value and fair value?

    Carrying value and fair value are two different accounting measures used to determine the value of a company's assets and ... Read Full Answer >>
Related Articles
  1. Investing Basics

    What's the Rate of Return?

    Rate of return is the earnings an asset generates in excess of its initial cost. The amount is usually expressed as an annualized percentage rate. Rate of return can be calculated based on the ...
  2. Insurance

    Ancient Accounting Systems

    Learn how accounting evolved to keep records of increasingly complex transactions and civilizations.
  3. Professionals

    Finding The Right Accounting Certification

    An accounting certification may be the boost your career needs. Find out how to get the most bang for your buck.
  4. Personal Finance

    A Look At Accounting Careers

    More than just crunching numbers, this career blends detective work with trouble shooting.
  5. Fundamental Analysis

    Internal Rate Of Return: An Inside Look

    Use this method to choose which project or investment is right for you.
  6. Options & Futures

    Mark-To-Market Mayhem

    Did this accounting convention contribute to the credit crisis of 2008? Find out here.
  7. Economics

    Explaining the Value Chain

    A model of how businesses receive raw materials as input, add value to the raw materials, and sell finished products to customers.
  8. Fundamental Analysis

    Explaining Variance

    Variance is a measurement of the spread between numbers in a data set.
  9. Investing Basics

    Understanding Risk-Return Tradeoff

    The essence of risk-return tradeoff is embodied in the common phrase “no risk, no reward.”
  10. Economics

    What Is Supply?

    Supply is the amount of goods a producer is willing to produce at a given price, and is one of the most basic concepts in economics.

You May Also Like

Hot Definitions
  1. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  2. Standard Error

    The standard deviation of the sampling distribution of a statistic. Standard error is a statistical term that measures the ...
  3. Capital Stock

    The common and preferred stock a company is authorized to issue, according to their corporate charter. Capital stock represents ...
  4. Unearned Revenue

    When an individual or company receives money for a service or product that has yet to be fulfilled. Unearned revenue can ...
  5. Trailing Twelve Months - TTM

    The timeframe of the past 12 months used for reporting financial figures. A company's trailing 12 months is a representation ...
Trading Center