Next video:
Loading the player...

Accounting profit is the net earnings of a business as calculated under Generally Accepted Accounting Principles (GAAP). Accounting profit includes gross revenue minus expenses, but also includes explicit costs of doing business such as interest, taxes and depreciation. Accounting profit is often referred to as financial profit.

Accounting profit is different than economic profit, which also includes opportunity costs and focuses on efficient utilization of assets and recourses. 

For example, Grace has been operating a dress shop for 50 years at the same location. She purchased the land and building for $1,000. Over the years, the area where Grace operates has grown. Grace’s shop now sits on some of the most valuable property in the city. If Grace rented her land, she could make $120,000 per year.

If Grace has $1 million in revenue and $800,000 in operating expenses, her operating profit is $200,000. Subtract depreciation, interest and taxes of $80,000, and Grace has an accounting profit of $120,000.

An economist will add the implicit cost of the forgone rent of $120,000 to the accounting profit calculation and say Grace’s economic profit is zero.

Related Articles
  1. Retirement

    Still Working? Here's How to Invest for Retirement

    Here's how three different portfolios impact your retirement savings while you're still employed.
  2. Investing

    Calculating Economic Profit

    Economic profit is the difference between the revenue a firm earns from sales and the firm’s total opportunity costs.
  3. Investing

    Gross, Operating and Net Profit Margins

    A company’s income statement includes the company’s gross, operating and net profits.
  4. Investing

    What is Normal Profit?

    Normal profit is an economic term that means zero economic profit.
  5. Investing

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  6. Investing

    What Is The Difference Between Revenue And Profit?

    Think of revenue as the top line of a company’s income statement. Profit is the infamous bottom line.
  7. Personal Finance

    The Credit Card Balance Transfer Trap

    Before you transfer a balance to a credit card with a lower interest rate, know how it affects new purchases and other fine-print traps that can cost you.
  8. Investing

    Is Net Income The Same As Profit?

    Net income and profit both deal with positive cash flow, but there are important differences between the two concepts.
  9. Investing

    Understanding Profit Metrics: Gross, Operating and Net Profits

    Rather than relying solely on net profit figures to evaluate a company's performance, seasoned investors will often look at gross profit and operating profit as well.
  10. Investing

    Profitability Indicator Ratios

    Learn about profit margin analysis, effective tax rate, return on assets, return on equity and return on capital employed.
Hot Definitions
  1. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  2. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  3. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
  4. Initial Coin Offering (ICO)

    An Initial Coin Offering (ICO) is an unregulated means by which funds are raised for a new cryptocurrency venture.
  5. The Bernie Madoff Story

    Bernie Madoff ran a multibillion-dollar Ponzi scheme that is considered the largest financial fraud of all time.
  6. Pyramid Scheme

    An illegal investment scam based on a hierarchical setup. New recruits make up the base of the pyramid and provide the funding, ...
Trading Center