The general consensus about accounting is that it is a clear-cut method of recording business figures. This is quite a misconception. In reality, there are many choices as to what numbers are added and how the numbers are added. All this is done within reason so that the business owners can make quality decisions from the information. So what does this mean to accounting profit? First we’ll get a consistent definition of accounting profit.

Accounting profit is a fairly simple calculation, but it can easily be confused with so many other, similar, terms. The basic definition is the difference between the price of all products/services sold and the cost of providing those products/services. The area that gets hazy is exactly what costs are included in bringing items to the market. The 2 categories that costs are placed are explicit and implicit. Accounting profit is calculated using only explicit costs.

Explicit Costs are items or services that money is required to be paid for. When payment is spent directly for something it is considered an explicit cost. Every job will have different costs to account for, but some examples include wages for employees, raw materials, rent, fuel, and interest on loans.

When time is spent on one project or activity instead of another, which is implicit cost. It is also referred to as opportunity cost. Let’s say an accountant chooses to repair his car himself instead of working in his office. If the repair takes 2 hours and the accountant could have been making $100/hr filing taxes then the implicit cost of repairing his car is $200.

There are several ways to increase the gap between selling price and the cost to produce. You can concentrate on lowering the cost by shopping around for lower prices, buying 1 item in bulk, or buying bundles of items from one seller and negotiating the price. One method that has been tried and failed is buying inferior supplies. The appearance of the product will look cheaper and it will not be as durable and if a customer is unsatisfied they will turn other customers away from you.

Another way to increase accounting profit is to increase the value or perceived value to raise the selling price. This can be done a multitude of ways, depending on the product or service. Higher quality material used, better construction methods, complimentary gifts and trinkets, delivery service, or even advertising with endorsements from respected celebrities.

As previously stated, accounting profit can be easily confused with other terms used to describe profit and revenue. When both explicit and implicit costs are added together, it equals total cost. When total income is subtracted by total cost, the outcome is defined as economic profit. As you can see the only difference between accounting profit and economic profit is the implicit or opportunity cost are figure in as well.

One way of remembering accounting profit is that accountant’s generally calculate only the monetary costs needed to pay for operating expenses. This is the case with most profit calculations because a large number of times the opportunity costs vary or are undefined.

Author: Joe Coffee
Article Source: EzineArticles.com
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