When you think of accounting, numbers and equations come to mind. The last thing on your mind is likely profit. But believe it or not, accounting profit is the holy grail of business analysis. In this post, we'll explore what exactly accounting profit is and how it's calculated.

What is an accounting profit?

If you ask an accountant what an "accounting profit" is, they'll probably give you a very long and complicated answer. But here's the thing: accounting profit is just a bookkeeping term that refers to the money a company has left over after paying all of its expenses.

In other words, it's the amount of money that would be left over if you took all of the company's revenue and subtract all of its costs. Of course, this doesn't necessarily mean that the company is actually making any money, because there are a lot of other factors that come into play (like taxes).

But at least from an accounting perspective, profit is simply the difference between revenue and expenses. So there you have it: an accounting profit is nothing more than a bookkeeping term for the money a company has left over after paying all of its bills.

However, accounting profit also includes things like depreciation and amortization. In other words, it's the total income from all sources minus the total expenses incurred during the same period.

Depreciation and amortization are important because they help businesses to determine the true cost of their operations. Without them, businesses would have a difficult time understanding their true profitability.

Why is accounting profit important?

Although many people think that accounting profit is simply a number that an accounting firm use to measure the success of a business, accounting profit is actually important for taxpayers as well! Here's why:

When it comes to taxes, corporations are taxed based on their accounting profits. This means that if a corporation reports high accounting profits, it will be taxed at a higher rate. However, if a corporation reports low accounting profits, it will be taxed at a lower rate.

As you can see, it is in a corporation's best interest to report high accounting profits!

Now, you may be wondering how corporations can report high accounting profits. There are two ways: by increasing revenue or by decreasing expenses. Let's take a look at an example:

say Corporation X has the following income and expenses for the year:

Income: $100,000

Expenses: $50,000

Accounting Profit: $50,000

Now let's say Corporation Y also has the following income and expenses for the year:

Income: $100,000

Expenses: $75,000

Accounting Profit: $25,000

Even though both Corporation X and Corporation Y had the same amount of income, Corporation X will be taxed at a higher rate because it has a higher accounting profit. Therefore, it is in a corporation's best interest to report high accounting profits! And that's why accounting profit is so important for taxpayers!

Wrap Up!

Now you know why accounting profit is so important for taxpayers! By understanding how corporations are taxed, you can help ensure that your taxes are as low as possible!