Calculation of profit: accounting and economic profit

Analysis of the activities of any business entity is performed by applying two approaches, which are conventionally referred to as economic and accounting. The second is based on the cost analysis included in the financial statements. For economic analysis used not only the set of real indicators reports, and the opportunity cost, i.e. a benefit, which is recognized lost.

Terminology

Under the accounting costs refers to actual payments that are made to the documentation. If earned income is deducted accounting costs, it will be a calculation of accounting profits. Forth from it is required to deduct taxes and other mandatory payments, resulting in a net profit, as it serves as a backup source of funding and accounted for the tax authorities.

If you calculate accounting profit and economic, you should know that in economic costs in addition to accounting, ranked as the implicit or internal, that is, the opportunity cost of resources available to the entrepreneur. The evaluation of these internal costs is made depending on the possibilities of alternative use.

For example, the entrepreneur may use your car for industrial purposes. Economists are convinced of the need to account for such costs, however, accounting cannot do this, as there is no payment from someone someone. Is not reflected in accounting. On the part of economists might be of the opinion that the car could be used otherwise, for example, the entrepreneur has the opportunity to rent it, for which he will receive the rent. Therefore, economists lost rents recognized internal cost.

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Features

Therefore, when considering accounting and economic profits, it is worth noting that the latter represents the difference between revenue and economic costs. To reduce the difference between economic and accounting costs required to record in accounting the costs as accurately as possible, though usually this difference cannot be reduced to zero. But even when economic profit is less than accounting, and even tends to zero, the entrepreneur will continue to operate, getting the accounting profit.

Historical development

In the 19th century, we looked into different types of profit: accounting and economic, and then it was obvious quite a strong difference between them. It was then that Alfred Marshall developed the first indicator is economic profit. It was determined as the difference between the net profit and cost of capital of the owner, and this is called residual income. While the calculations seem simple, in practice it turns out that you need to find a whole array of information needed for this.

The Main focus of Alfred Marshall was made of the fact that in determining the value generated by a company at a specific point in time, it is necessary to consider not only the costs, which are reflected in accounting records but also the opportunity costs associated with raising capital.

The Long development time Marshall was unclaimed, and the value of economic profit was not so great. However, in the 80-ies of the last century with the advent of globalization and capital flows to developing countries began to consider different types of profit: accounting and economic. They are used to demonstrate alternative performance company with the aim of attracting new investors.

Economic profit

She acted as one of such indicators by which to attract new partners into the business. It assumes that the additional cost of the invested capital will be created only when the real income exceeds the opportunity cost of this capital. You can simplify the definition as follows: economic profit only exists if the obtained financial result will exceed all alternative uses of the considered capital.

How to use the method?

Until the formation of enterprise's profit is reflected only in the accounting records. Economic profit is not caught in the domestic practice of calculations, and there are several reasons. First of all we are talking about ignorance of how to use this concept in decision making management personnel. All used to analyze the accounting profit, therefore the activity of the company is considered only through the prism of this factor. And those companies who have decided to use this method, face the challenge of adapting economic profit to the standards of tax and accounting.

Calculation Standards

At the moment, the calculations shall use the formula of profit, which meets the international standards of accounting and reporting, as well as American standards. Among themselves they are fully compatible, uses the same principlesaccounting and reporting, and on certain issues in the American standards methods spelled out more clearly.

The Requirements of international standards aimed at bringing the legislation of the current system of financial reporting standards and accounting in some kind of harmonious condition. It is considered that it is useful to characterize the results of business activities of enterprises in a more realistic form. However, the American technique is based on a larger number of developments, so American companies tend to regulate the activities quite clearly with less flexibility each organization separately.

At this point the economic profit in the balance sheet generally is not affected, and its calculations are scientific or closed. The development of its widespread use is hampered by standardisierungsrat financial statements and certain conservatism in accounting.

Economic profit

When using the index of residual income, which was proposed by Marshall, the companies had problems with mapping source data: the cost of capital will be to consider the yield received by the enterprise on the basis of market value, the net profit is used as an accounting term, is calculated on the base account value. Naturally, the development of the world economy and market relations became the reason of deepening of disagreements between market and accounting value of the company, for which the level of residual income has become impossible.

Types of income

The Different accounting, economic and normal profit. Usually economic profit is the difference between total revenue and costs: external and internal. If the number of turns on internal costs and normal profit, which represents the minimum cost to retain entrepreneurial talent. Profit, which is calculated on the basis of information of accounting, represents the difference between revenues from different types of activities and external costs. Real income is the income that remains in the accounts of the entrepreneur.

At the moment accounting involves the use of five types of profit: gross, net profit, profit before taxation, profit from ordinary activities, net profit. Gross – the difference between the revenue from sales of goods, products, services and cost of goods sold, works, services, and products. Revenue received from sales of goods, works, services and goods, are called revenues from ordinary activities. The formula for profit in this case is as follows:

P (Val) = BP, where BP – the proceeds derived from the sale; - the cost of the implement.

Features of each profit

The Profit from sales is gross profit minus selling and administrative expenses.

Profit before tax represents profit from sales other expenses and income, which can be operating and non-operating. Operating revenues include revenues associated with the provision of the organization's assets for a payment in temporary use. Non-operating income recognized fines and penalties for violation of contractual terms, assets that are received free of charge profit of past years revealed in the reporting period.

Profit from ordinary activities is obtained by deducting from the profit before tax compulsory payments and taxes.

Net profit represents profit from ordinary activities, which include extraordinary income and expenses. Under extraordinary income refers to income that arise as a result of emergency economic activity. Under the extraordinary expenses refer to the costs associated with similar situations.

“Dancing” costs

If you are considering accounting, economic and normal profit, it is worth noting that in General profit is determined as the difference between total revenue and total costs. This is the simplest and common calculation which can be applied generally.

Now you need to pay attention to costs. Accounting and economic profit involves different approaches to their definition. The costs themselves can be external and internal. The first group includes payments to external suppliers. When subtracting from the total revenue to the accounting profit. But it will not take into account internal costs, which can include:

• Costs of resources owned by the enterprise;
• Normal profit, which is dependent on key resource – business abilities.

Economic profit is obtained after accounting internal costs will be removed.

The Most obvious differences

It Turns out that accounting profitis intended only to account for external costs and the economic is determined by subtracting the internal costs. The amount of external and internal costs of economic form, they are called alternative. This means that to determine the amount of the real profit should come from a resource price that would be received by the owner in its best use. Formation of profit of the enterprise when this happens, regardless of the method of its calculation. But it is important to understand that the best option is to increase the economic profit.