The concept of economic and accounting profit: definition, features and formula

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Before you start your business, you need to draw up a clear action plan and calculate financial performance. The most basic of these is profit. However, it can be calculated in different ways. And you need to clearly understand the difference between accounting profit and economic profit. The boundary between these terms is rather narrow. But it is important for a financial specialist to be able to distinguish between these terms.

Accounting profit (loss): entity and types

This is the financial result from operations. This indicator is calculated for each reporting period according to the algorithm approved by the legislation. The difference between income and expenses is recognized in the income statement.

Taxes are deducted from accounting profit. Payment of fees to the treasury is not always synchronous. This is due to the peculiarities of the use of deductions. If the organization does not reduce the taxable base in the current period, then the tax profit will be greater than the accounting one. And thisrecorded in reports. In the next period, the company will use its right to deduct, and these indicators are aligned. Therefore, economists distinguish several types of accounting profit.

1. Gross income is the difference between revenue without VAT and cost.
2. Profit from sales is the difference between the proceeds of goods and the cost of bringing them to market.
3. Profit from ordinary (operating) activity is the financial result that remains after deducting expenses from the main activity (production).
4. Profit before tax is the financial result that remains after the deduction of expenses from all activities. After all, an organization can not only engage in the manufacture of products, but also invest free funds in shares (investment activities). Or purchase an asset (building) and then rent it out (financial activity). The sum of the financial results from all the listed works is the profit before tax.
5. Net profit is cash. who remain with the firm after paying tax.

Economic profit

This indicator reflects the increase in the value of the firm. When calculating the indicator, invisible items of expenditure, such as depreciation, are not taken into account. Not all enterprises set aside monthly funds for OS repair. Depreciation reduces the taxable base, so it must be taken into account when drawing up the balance sheet. But this indicator will not be included in the economic report.

Accounting profit provides a strategic assessment of the development of the company, and economic - tactical. The task of the accountant is to check the reflection of all expenses and the correct calculation of taxes. The task of the economist is to identify the growth prospects and bottlenecks of the enterprise.

Opportunity cost

Economists determine the amount of lost profits as a result of choosing a particular direction of investment. These are the so-called opportunity costs. For example, a company launches the production of washing machines and stops the production of televisions. At the same time, the price of the services of satellite operators is sharply declining in the market, which leads to an increase in demand for TV sets. The lost revenue is the opportunity cost.

In accounting, the structure of products may not be taken into account. It is not the responsibility of an accountant to calculate the demand potential in a particular segment. Its task is to correctly accrue profit, draw up a balance sheet and a profit and loss statement. The economist must pay close attention to the calculation of opportunity costs. Analyzing these figures, one can determine the direction of investment activity.

Factors

There are indicators that determine the profitability of an organization. They are conditionally divided into internal and external. The former include: the level of competence of specialists, the quality of management of managers, the competitiveness of goods, the organization of production, the manufacturability of infrastructure, and labor productivity. External factors include: politic althe situation, the process of regulating the economy, supply and demand in the market.

Accounting profit is fixed according to actual indicators and does not depend on the listed factors. Instead, opportunity costs are determined based on the market situation.

Why do we need this data?

For what purpose can economic and accounting profits be calculated? The definition of the first indicator is necessary for the enterprise itself. The business owner builds a model, refines it, and analyzes it for himself. Calculations must be submitted to government agencies. Profit in accounting is additionally analyzed to identify deviations in planned and actual indicators.

Economic profit experts determine the effectiveness of investing in a business. Provided, of course, that it is correctly calculated. The accounting report on profits and losses, its structure and algorithm of formation is set at the level of legislation. The enterprise develops the algorithm for the formation of economic profit independently. While there are commonly accepted forms in some industries, they are not appropriate for a particular organization's business model. Therefore, experts believe that it is better to analyze the state of the company by accounting profit. Although there are situations when the indicators from the income statement do not affect important business processes. Why is that? Yes, because accounting profit does not reflect the real sources of its formation. In such situations, without calculating the economy,get by.

Example

Two factories produce building materials. According to accounting records, they have the same revenue and profitability. Comparable items are included in the balance sheet and income statement. But at the first plant, the main customers are large holdings, and the second sells materials to small / medium-sized enterprises. After the aggravation of the political situation, the activities of holdings cease in the Russian Federation, customers leave the market. While the first plant is going through difficult times, the second will develop in connection with the entry of new production facilities into the market. Thus, different results of commercial activity are visible for enterprises operating in the same segment. Such a crisis could have been foreseen if economic analysis had been used.

A successful commercial enterprise is obliged to calculate the financial result, charge tax on accounting profit. At least in order to submit a report to the Federal Tax Service. The task of an economist at the first enterprise is to analyze the client base and offer to switch to the segment of small and medium-sized businesses. At the second enterprise, the task of an economist is to find opportunity costs.

Calculation formula

Accounting profit is the difference between gross income and expenses. It is calculated by the formula:

Pb=Gross income - Expenses.

Gross income is the sales proceeds minus taxes. Costs are the costs associated with making a product.

Economic costs include domestic costsand external (purchase, payment for services, labor). In accounting only external costs are taken into account, therefore, accounting profit is calculated as the difference between revenue and costs incurred. When calculating this indicator, it is important to consider the following elements:

• Net income - profit from the sale of goods - NH.
• Profit from the sale of fixed assets (buildings, equipment, other means of labor,) - Pi.
• Profit from non-operating activities - Air defense.
• Gross profit formula: PB=Pr + Pi + Pvo.

Knowledge of the formula is necessary not only to evaluate performance, but also in order to reduce income tax accounting, STS.

Profit planning

The efficiency of the organization and the possibility of increasing the value of its assets depend on the correctness of the forecast, the distribution of profits and the search for ways to optimize it. If product prices are stable, then when making a forecast for the year for seasonal and non-seasonal goods, data for the past 3-6 months are selected. It does not matter which method was chosen: direct account, analytical, operational leverage.

Conclusion

From all of the above, we can conclude that an accountant keeps records of numbers, an economist calculates a strategy. These two specialists do not exclude, but complement each other. In the event of a negative financial result, it is urgent to change the production technology, raw materials or move to other markets. Often the reason for low profitability is low productivity,outdated equipment in the manufacturing sector, as well as high costs for the implementation of the service or advertising.