Accounting Profit Formula

Accounting Profit Formula (Table of Contents)

• Formula
• Examples
• Calculator

What is the Accounting Profit Formula?

The term “accounting profit” refers to the total earning of a company after deducting all the explicit costs of doing business. The explicit costs include operating expenses, depreciation & amortization, interest, and taxes. In other words, accounting profit is similar to net profit which the difference between the revenue and all the other dollar costs identified according to Generally Accepted Accounting Principles (GAAP). The formula for accounting profit can be derived by subtracting the explicit costs incurred doing business from the total revenue generated from the business. Mathematically, it is represented as,

Examples of Accounting Profit Formula (With Excel Template)

Let’s take an example to understand the calculation of Accounting Profit Formula in a better manner.

Accounting Profit Formula – Example #1

Let us take the example of a company that reported total revenue of $500,000 and explicit costs of $350,000 during FY18. Calculate the accounting profit of the company.

Solution:

Accounting Profit is calculated using the formula given below

Accounting Profit = Total Revenue – Explicit Costs

• Accounting Profit = $500,000 – $350,000
• Accounting Profit = $150,000

Therefore, the company generated an accounting profit of $150,000 during FY18.

Accounting Profit Formula – Example #2

Let us take the example of a company Foodland Stores Ltd. which is a grocery retail chain company operating in the province of Alberta, Canada. During FY18, the company booked total revenue of $40.00 million, with the cost of goods sold of $28.00 million, employee cost of $6.00 million, depreciation expense of $0.80 million, selling & administrative expense of $1.60 million, an interest charge of $0.50 million and taxes of $0.25 million. Calculate the accounting profit of the company for the year 2018 based on the given information.

Solution:

Explicit Costs is calculated using the formula given below

Explicit Costs = Cost of Goods Sold + Employee Cost + Selling & Administrative Expense + Depreciation + Interest + Taxes

• Explicit Costs = $28.00 million + $6.00 million + $1.60 million + $0.80 million + $0.50 million + $0.25 million
• Explicit Costs = $37.15 million

Accounting Profit is calculated using the formula given below

Accounting Profit = Total Revenue – Explicit Costs

• Accounting Profit = $40.00 million – $37.15 million
• Accounting Profit = $2.85 million

Therefore, Foodland Stores Ltd. generated an accounting profit of $2.85 million during the year 2018.

Accounting Profit Formula – Example #3

Let us take the example of Walmart Inc. to illustrate the concept of accounting profit for the real supermarket chain. As per the latest annual report, Walmart reported total revenue of $500.34 billion during FY18. During the period, the company incurred a cost of sales of $373.40 billion, operating and SG&A expense of $106.51 billion, the interest of $2.18 billion, extra-ordinary loss of $3.14 billion and taxes $4.60 billion. Calculate the accounting profit generated by Walmart Inc. during FY18.

Solution:

Explicit Costs is calculated using the formula given below

Explicit Costs = Cost of Sales + Operating and SG&A Expense + Interest + Extra-Ordinary Loss + Taxes

• Explicit Costs = $373.40 billion + $106.51 billion + $2.18 billion + $3.14 billion + $4.60 billion
• Explicit Costs = $489.83 billion

Accounting Profit is calculated using the formula given below

Accounting Profit = Total Revenue – Explicit Costs

• Accounting Profit = $500.34 billion – $489.83 billion
• Accounting Profit = $10.51 billion

Therefore, Walmart Inc. Stores Ltd. earned an accounting profit of $10.51 billion during 2018.

Sources Link: Walmart Inc.Balance Sheet

Explanation

The formula for accounting profit can be derived by using the following steps:

Step 1: Firstly, determine the total revenue of the company which is usually easily available as the first line item of the income statement. On the other hand, the total revenue can also be calculated as the product of the average price per unit and the number the units sold during a year.

Total Revenue = Average Price Per Unit * Number of Units Sold

Step 2: Next, determine all the explicit costs that are incurred during the course of the business and it includes the cost of raw material, wages & salaries, rental expense, electricity bills, telephone bills, selling & administrative expenses, depreciation, interest, taxes, etc.

Explicit Costs = Cost of Raw Material + Wages & Salaries + Rental Expense + Electricity Bills + Telephone Bills + Selling & Advertising Expenses + Depreciation + Interest + Taxes

Step 3: Finally, the formula for accounting profit can be derived by subtracting the explicit costs (step 2) of doing business from the total revenue (step 1) generated from the business as shown below.

Accounting Profit = Total Revenue – Explicit Costs

Relevance and Use of Accounting Profit Formula

It is very important to understand the concept of accounting profit because while managers or business owners monitor the financial statements on a monthly or quarterly basis, most of the time they will be taking note of the bottom line of the income statement i.e. accounting profit. Another thing to note is that accounting profit is distinctively different from economic profit and as such should never be used as an alternative to each other. Accounting profit represents the monetary difference between revenue that is generated and the expense that is paid off. O the other hand, economic profit is arrived after adjusting the opportunity cost from the accounting profit.

Accounting Profit Formula Calculator

You can use the following Accounting Profit Formula Calculator

1. Formula for Average Fixed Cost
2. How to Calculate Economic Profit
3. Example of Operating Income Formula
4. Calculation of Net Interest Margin