Accounting Profit: Definition, Calculation, and Examples

What is accounting profit?

Accounting profit (also called bookkeeping profit or net income) is a company’s total earnings calculated under generally accepted accounting principles (GAAP). It equals total revenue minus all explicit, monetary costs of doing business—such as wages, inventory and raw materials, transportation, production overhead, interest, depreciation, and taxes.

Key takeaways

• Accounting profit measures actual, recorded monetary results after subtracting explicit costs.
• Explicit costs include labor, materials, production overhead, sales and marketing, transportation, interest, depreciation, and taxes.
• Economic profit differs by also subtracting implicit (opportunity) costs; underlying profit strips out nonrecurring items.
• Accounting profit is used for financial reporting and tax purposes; economic profit is a managerial decision tool.

How accounting profit is calculated

Accounting profit appears on the income statement and is typically derived through these steps:

1. Start with total revenue (sales).
2. Subtract cost of goods sold (COGS) to get gross profit.
3. Subtract operating expenses to get operating income (EBIT or EBITDA depending on whether depreciation/amortization are included).
4. Subtract non-operating expenses (interest, depreciation, amortization) to get earnings before tax (EBT).
5. Subtract taxes to arrive at net income (accounting profit).

Accounting profit vs. economic profit

Both measures subtract explicit costs, but economic profit also includes implicit costs—the opportunity costs of using resources in their current way rather than in their next-best alternative. Examples of implicit costs include:

• Forgone salary if an owner leaves paid employment to run the business.
• The opportunity value of owner-occupied buildings, equipment, or capital invested in the business.

Simple example:
* Accounting profit = Revenue − explicit costs = $20,000.
* If the owner gave up $50,000 in salary to run the business (an implicit cost), economic profit = $20,000 − $50,000 = −$30,000.

Accounting profit vs. underlying profit

Underlying profit (management-adjusted profit) excludes items considered one-time, infrequent, or nonoperational—such as restructuring charges, gains or losses on asset sales, or disaster-related losses. Companies present underlying profit to give investors a sense of recurring operational performance, but these adjustments are subjective and should be scrutinized.

Worked example

Company A (manufacturing) in January:
* Price per unit: $5
* Units sold: 2,000
* Revenue = 2,000 × $5 = $10,000

Step-by-step:
1. COGS (production cost $1 per unit) = $2,000 → Gross profit = $10,000 − $2,000 = $8,000
2. Operating expenses (salaries, etc., excluding depreciation) = $5,000 → EBITDA = $8,000 − $5,000 = $3,000
3. Depreciation = $1,000 → EBIT = $3,000 − $1,000 = $2,000
4. Interest = $0 → EBT = $2,000
5. Tax (35%) = $700 → Net income (accounting profit) = $2,000 − $700 = $1,300

Uses and limitations

• Uses: financial reporting, tax filings, dividend and earnings-per-share calculations, and analyst comparisons.
• Limitations: excludes opportunity costs and may be influenced by accounting choices (depreciation methods, classification of expenses). Management-adjusted profits (e.g., underlying profit) can improve comparability but may introduce subjectivity.

Conclusion

Accounting profit provides a standardized, recorded measure of a company’s monetary performance for a reporting period. It is essential for reporting and taxation but does not account for opportunity costs or adjust for nonrecurring items—so it should be considered alongside economic-profit analyses and any management-adjusted performance metrics.