Accounting profit or net profit is the figure used by most business owners to determine whether their company is profitable. Net profit on a financial statement is generally calculated using Generally Accepted Accounting Principles (GAAP). GAAP are set up by policy boards and consist of rules governing the calculation of a financial bottom line or net profit. However, determining a profit does not include lost opportunity costs and other costs included in calculating economic profits.
Gather all revenue figures, which will include goods sold, rent received, interest earned, infrastructure or equipment sold, and any other revenue gained by the business.
Calculate cost of goods sold. Include raw materials and labor costs directly related to producing the product. Do not include certain labor costs such as distributor costs or sales force costs. A basic calculation would be to take dollar figures associated with the beginning inventory of raw materials, add all purchases of raw materials, and subtract the ending inventory giving the amount used during this accounting period and assigning a dollar figure to the difference. Assign a dollar figure using either the first-in-first-out method or the last-in-first-out method. If you use first-in-first-out, use the amount you paid for the oldest inventory. If you use last-in-first-out, use the amount you paid for the most recent purchases. Be consistent.
Subtract the figures calculated in Step 2 from the revenue figures in Step 1 to determine the gross profit before overhead. Add up all overhead expenses, which include such items as indirect labor and staff salaries, building rent, utilities, and depreciation.
Subtract the figures calculated in Step 4 from the figures determined in Step 3 to get the profit before taxes.
Subtract taxes from the figure you arrived at in Step 5. This is the figure you were targeting and is the net profit, or the bottom line of your business.
Diane Majors has been a freelance writer since 2001. Her experience includes working as an associate editor and writer for her college newspaper, as well as authoring e-books, ad copy and marketing materials for various companies and clients. Majors is a graduate of Eastern Kentucky University, earning a Bachelor of Arts in journalism.