Accounting profit is the profit of a business that includes all revenue and expense items mandated under an accounting framework. This profit figure is used in an organization's financial statements.
Examples of accounting frameworks are Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). These frameworks mandate the use of accrual basis accounting in deriving the accounting profit figure. Thus, if total recorded revenues exceed total recorded expenses, the remainder is an accounting profit. Conversely, if total recorded revenues are less than total recorded expenses, the remainder is an accounting loss.
The accounting profit equation is:
Revenue per GAAP or IFRS - Expenses per GAAP or IFRS = Accounting profit/loss
The concept does not include opportunity cost, which would be included in the more comprehensive economic profit concept.
Example of Accounting Profit
ABC International records $100,000 of revenues in its most recent reporting period through the issuance of customer invoices, and also accrues an additional $20,000 of revenue, as per IFRS standards, resulting in $120,000 of revenue. ABC also records $85,000 of expenses in the same period through the recordation of supplier invoices and wage payments to employees, and also accrues an additional $25,000 of expenses, as per IFRS standards, resulting in $110,000 of expenses. The result is:
$120,000 Revenue per IFRS - $110,000 per IFRS = $10,000 Accounting profit