Businesses are most concerned with the effect on their bottom line. Increasing revenues or decreasing costs are the main means of influencing the bottom line. Like accounting profit, economic profit deducts explicit costs from revenue. Where they differ is that economic profit also uses implicit costs; the various opportunity costs a company incurs when allocating resources elsewhere. Accounting profit is a company’s total earnings, calculated according to generally accepted accounting principles (GAAP).
The income generated is always distributed to the stakeholders of production as economic value within the review period. The profit is the share of income formation the owner is able bookkeeping for startups to keep to themselves in the income distribution process. Profit is one of the major sources of economic well-being because it means incomes and opportunities to develop production.
The management can easily manipulate these principles to window dress the accounting profit. The accounting profit of a business is also easily susceptible to change. This can disadvantage investors or stakeholders that make decisions based on it. Secondly, accounting profit is a crucial figure management uses when making strategic decisions. Firstly, it is a primary indicator of a business’s performance and is closely monitored by investors and stakeholders to assess its performance over a given accounting period. Businesses may also need to recalculate some expenses such as depreciation according to the tax laws and not accounting laws.
However, if you calculate profit margin monthly, you’ll identify limiting factors much sooner. As such, you can address them much earlier and increase profitability for the year. More detailed definitions can be found in accounting textbooks or from an accounting professional.
Calculating accounting vs. economic profit
Similarly, due to different financial reporting frameworks, such as GAAP. IFRS, etc. the accounting profits of the same business may be different when using different financial reporting frameworks, thus, making the comparison even more difficult. The following equation can be used to calculate the accounting profit of any business or company.