What Is an Accounting Profit?

Accounting profit refers to the balance of the total revenue of an enterprise after deducting all explicit costs or accounting costs. Explicit costs refer to the actual expenditures incurred by an enterprise in order to obtain various production factors required for production, which mainly include wages paid to employees, various raw materials, parts, and fuels purchased in production. When referring to profit in economic analysis, it refers to the surplus after deducting all the opportunity costs of all factors of production, such as land, labor, and capital, from all the profits obtained by the enterprise. Opportunity cost is the price at which a manufacturer produces a product or service. Hidden costs are not considered in the calculation of accounting profits, that is, the opportunity costs caused by the use of factors that have not been purchased or leased for production, are not reflected in the accounting records, but must be considered in economic analysis. Part of the cost. ^[1]

Accounting profit

For certain income and expenses, although companies use the same caliber when calculating pre-tax accounting profits according to accounting principles and calculating tax income according to tax laws, but if the calculation periods used by the two are different, that is, the recognition time is different, it will also make There is a difference between pre-tax accounting profits and taxable income. For example: a certain company's fixed assets have a useful life of 20 years in accordance with accounting regulations. If depreciation is calculated using the straight-line method, the annual depreciation rate is 5%;

There are also flaws in accounting profits. Because accounting profit uses a large number of estimates and judgments in its calculation process, for example, depreciation of fixed assets needs to be estimated and judged based on relevant information, and its useful life; if the bad debt costs of accounts receivable, it is also necessary to make according to the customer's credit situation Estimates and judgments, etc., which makes the calculated accounting profits to a large extent the result of subjective estimates and judgments. Because accounting profits can be calculated in a variety of accounting standards in the calculation process, such as the valuation of inventory can use the first-in first-out method; depreciation of fixed assets can use the straight-line method, or accelerated depreciation method, etc., Make the calculated accounting profit more artificial. The above-mentioned shortcomings of accounting profits are generally considered to be overcome by improving accounting standards and other methods.

Accounting profit difference

(1) The caliber is different. Accounting profit is a comprehensive reflection of a company's income, costs, and expenses during a period of time, that is, operating results, that is: accounting profit = revenue-cost-period expenses (including: financial expenses). Economic profit is the value of a company's investment capital income over the weighted average cost of capital, that is: economic profit = revenue-cost (including: capital cost of investment)-period expenses, can also be understood as economic profit = accounting profit-opportunity cost. When the capital invested by the enterprise is greater than zero, the economic profit will always be less than the accounting profit.

(2) Costs are different. Accounting profit, as a traditional accounting indicator, mainly considers accounting cost. Accounting cost is explicit cost. It is the cost of an enterprise engaged in certain economic activities, that is, the actual expenditure of the enterprise to purchase or hire production factors. Economic profit, as an indicator of the management accounting method of a modern company, considers economic costs. Economics considers cost to be the sum of the explicit and hidden costs of engaging in an economic activity. The latter is the provision of capital, The opportunity cost of natural resources and labor is the biggest loss that an enterprise loses by using time, assets, currency, etc. for other purposes when operating a certain product.

(3) The perspectives of the stakeholders are different. Accounting profits are established based on the organizational form of sole proprietorships and partnerships, and economic profits are established based on the organizational form of modern corporations. Accounting profit is an indicator of operating results from the perspective of the owner of the business owner's interests, while economic profit is generated from the perspective of the company's "personalized" subject independent of creditors and investors.

Accounting profit linkage

(1) Accounting profit is the premise for calculating economic profit. Accounting profit is a traditional indicator of operating financial results. On this basis, after deducting the cost of capital interest from investors, it is economic profit. Therefore, the calculation of economic profits must rely on accounting profits.

(2) Accounting profit and economic profit are the common goals and directions of enterprises in pursuit of maximizing value. Both accounting profit and economic profit are positive indicators. It can be said that in the same enterprise and the same accounting period, the greater the accounting profit, the greater the economic profit, and the greater the value of the enterprise. (3) Economic profit is a higher stage of the development of accounting profit, and it is in the same vein as accounting profit. Economic profits are derived from the replacement and improvement of accounting profits in accordance with social systems and corporate organizational forms. It is a new, more scientific management result and investment evaluation index that adapts to the organizational form of modern corporate enterprises.

Significance of accounting profit

First, to some extent, the two branches of accounting, financial accounting and management accounting, were coordinated. Management accounting recognizes and measures all costs including manifest costs and hidden costs. The current financial accounting only recognizes and measures the apparent costs, but ignores the hidden costs. The lack of unity between the two has not only adversely affected the theoretical development of the accounting disciplines, but also brought many inconveniences to their practical application. When the investment project is approved, the project is evaluated according to management accounting requirements. When the investment project is completed and put into operation, it is evaluated and evaluated by financial accounting. Due to the inconsistency of the two evaluation standards, people cannot understand the investment project. , Whether the required return on investment is achieved in the future production and operation process. The distinction between accounting profit and economic profit, especially the introduction of the concept of economic profit, solves this unavoidable but urgent problem. It not only unifies the "profit" caliber of financial accounting and management accounting, but also coordinates the allocation and use benefits of investment projects, thereby coordinating the two accounting branches of financial accounting and management accounting to a certain extent.

Second, make the net profit of the enterprise more economically significant. The introduction of economic profits has realized the economic transformation of accounting profits, which has caused accounting profits to interfere with economic profits. It has also expanded the perspective of accounting and introduced the concept of accounting costs and its measurement into the field of property rights. Under the current financial accounting procedures and methods, net income includes two parts: equity capital and real net income. Think of the cost of equity capital as part of your company's net income. Falsely increased the company's net income, thereby overestimating the company's operating results. Economic profits restore their original appearance, so that the net income of the enterprise truly reveals the business results of the enterprise. In this way, the net income of accounting is actually the economic value added in today's economics. Economists define profit as "increased wealth" and "under the premise of maintaining the same wealth, the maximum amount that a person may spend this week ". This eliminates the differences between accounting and economics in the understanding of business results. Traditional financial accounting does not recognize the cost of equity capital, and the calculated net profit includes the cost of equity capital.

Therefore, the net profit indicator does not truly reflect the business performance of the enterprise, and it lacks its due economic significance. After the introduction of the economic profit index, the net profit on the income statement, which is the net profit after deducting the cost of equity capital, will have more economic significance, and also the significance of distinguishing accounting profit and economic profit.