How to Calculate Accounting Profit

Calculating accounting profit is straight-forward..

The world of accounting often has two different income figures: one represents cash and the other represents cash plus credit sales. Credit sales are listed as an asset on the income statement and are usually recognized as revenue immediately. Depreciation is a non-cash expense that accountants subtract from revenues. For this reason, Accounting Profit (which is the same as Net Income) may be quite different from actual cash profit.

Instructions

1. Determine the total sales or revenues for the business. This includes all credit sales.

   Let's say total revenues are $10,000.

2. Calculate Gross Profit. Subtract the cost of goods sold (COGS) from revenues. Depreciation expense is a part of COGS, along with the sum of all direct labor and material associated with sales.

   Let's say COGS are $5,000. The Gross Profit calculation is:

   $10,000 - $5,000 = $5,000.

3. Calculate Operating Profit. Operating Profit is the next level of accounting profitability. Subtract Operating Expenses from Gross Profit. Common Operating Costs are administrative labor, rents and utilities.

   Let's say Operating Expenses are $1,000. Operating Profit is calculated as:

   $5,000 - $1,000 = $4,000.

4. Calculate Accounting Profit (Net Income). Subtract taxes and interest expense (if any) from Operating Income to get the Accounting Profit.

   Let's say taxes are $1,000 and interest is $500. Accounting Profit is then calculated as:

   $4,000 - $1,000 - $500 = $2,500.

References

• Investopedia: Income Statement