Accounting profit is the difference between a company's total revenues and total expenses. The expenses include operating costs, taxes, interest and depreciation. The rules for accrual-based accounting, either generally accepted accounting principles or international financial reporting standards, guide companies in calculating accounting profit. Small companies that operate on a cash basis can't calculate accounting profit because they don't observe the accounting standards of companies employing accrual-based accounting.
Determine the total sales or revenues for the business. This includes all credit sales.
Let's say total revenues are $10,000.
Calculate gross profit by subtracting the cost of goods sold from revenues. COGS includes the sum of all direct labor and material associated with sold goods and services.
Let's say COGS are $5,000. The gross profit calculation is:
$10,000 - $5,000 = $5,000.
Calculate operating profit, the next level of accounting profitability. Subtract operating expenses from gross profit. Common operating costs are salaries and wages, payroll taxes, advertising, supplies, travel and entertainment, depreciation, rents and utilities.
Let's say operating expenses are $1,000. Operating profit is calculated as:
$5,000 - $1,000 = $4,000.
Figure in non-operating income and expenses, such as settlements from lawsuits, interest income, interest expenses and taxes.
Calculate accounting profit, which is the company's net profit, by adjusting operating income with non-operating income and expenses.
Let's say non-operating expenses are taxes of $1,000 and interest of $500. Accounting profit is then calculated as:
$4,000 - $1,000 - $500 = $2,500.
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