What is an Accounting Profit?

Accounting profit is a company’s total earnings calculated from internal financial information. This figure is calculated by taking the gross sales or revenues of a company, minus the cost of goods sold and any expenses used to generate the net profit. Expenses may include selling and administrative, depreciation, interest, or tax expenses. The specific types of expenses may also depend on the company’s operating environment and business operations. Accounting profit is usually represented on the company’s income statement. Income statements may be prepared for specific accounting periods, such as a monthly or annual time period.

Monthly net income statements only reflect the information relating to the current time period for generating profit. Accountants may post accrual or deferral journal entries to add or remove amounts that should not be included in the current month’s income statement. This principle falls under the accrual-based accounting method for determining accounting profit. Annual net income statements consist of the aggregate total for each monthly net income statement. This annual net income statement indicates the total annual profit the company has earned from business operations. This information is used by internal and external business stakeholders.

Internal users of the company’s financial statement often include business owners and managers. These individuals review the accounting profit for monthly and annual time periods to determine how well the company is generating profit compared to the amount of money spent on expenses and cost of goods sold. Internal users may break the income statement down using financial ratios; these ratios provide internal users with a benchmark for comparison to industry standards or a competitor’s financial statement. This information also gives business owners and managers a deeper understanding of how well their company is generating profits.

External business stakeholders may be concerned with the company’s accounting profit for a variety of reasons. Banks or lenders often use net income statements to ensure the company is generating enough profits to repay any bank loans used to finance business operations. Shareholders of publicly held companies may review the net income statement to see how well the company is generating profit in comparison to previous accounting periods. Accounting profit listed on the net income statement directly affects the amount of a company’s earnings per share. Increases in the company’s earnings per share usually indicate a gain for shareholders. Companies who pay dividends to shareholders may do so out of the accounting profit earned during each accounting period. Shareholders are concerned with this information since it represents a passive income stream in which they make money off of the company’s performance.