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The Accounting Profit Figure Is Simply a Measure of the True Profit of an Organisation

Essay by   •  January 5, 2019  •  Coursework  •  276 Words (2 Pages)  •  196 Views

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“The accounting profit figure is simply a measure of the true profit of an organisation.”

Accounting profit is the net residual revenues after deducting the explicit costs from a business’ total revenues in line with Generally Accepted Accounting Principles (GAAP).

Explicit costs are costs that can be easily recognised and calculated. For example, labour costs are considered explicit costs because they show an exact amount paid for salaries during a certain period. Other than labour costs, explicit costs also include costs of raw material, depreciation expenses, and taxes. The frameworks set by GAAP obligate the practice of accrual basis in achieving the accounting profit. Thus, if the total revenues are greater than the total expenses, the surplus are considered as an accounting profit. Contrariwise, if the total revenues are lower than the total expenses, the deficit is considered as an accounting loss. This concept does not take into account opportunity cost, as it would be integrated in the concept of economic profit. Normally, accounting profit is only for a period of time, such as a year or a fiscal quarter. Accounting profit figures are mostly used for income tax calculations, preparations of financial statement and to evaluate the financial performances of the businesses. All the costs calculated are the amounts that actually had been paid for except the depreciation expenses. The accountants do not take into account the implicit costs when calculating the profit because all these costs have not incurred yet and are simply based on assumptions.

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