Calculation of profit: accounting and economic profit

An analysis of the activities of any business entity is made using two approaches, which are conditionally called economic and accounting. The second is based on an analysis of costs that are recorded in the financial statements. For economic analysis, not only a set of real indicators of reports is used, but alternative costs, that is, benefits that are recognized as lost.

Features of terminology

Accounting costs are understood as actually made payments, which are entered in the documentation. If the accounting income is deducted from the received income, then it will be the calculation of the accounting profit. Further, it requires subtracting taxes and other mandatory payments, which results in a net profit, and it serves as a backup source of financing and is accounted for by the tax authorities.

If accounting and economic profits are calculated, it is worthwhile to know that in economic costs, in addition to accounting, the implicit or internal, that is, the alternative cost of resources available to the entrepreneur, is included. The estimation of these internal costs is made depending on the possibilities of alternative use.

For example, an entrepreneur can use his car for production purposes. Economists are convinced of the need to account for such costs, but accounting can not do this, since there is no fact of payment from someone to someone. This is not reflected in the accounting. Economists may think that the car could be used differently, for example, an entrepreneur has the opportunity to lease it, for which he will receive a rent. Therefore, economists do not receive the rent that is received as internal costs.

Characteristics

So, if we consider the profit accounting and economic, it is worth noting that the latter personifies the difference between income and economic costs. To reduce the difference between economic and accounting costs, it is required to fix the costs in accounting as accurately as possible, although usually this difference can not be reduced to zero. But even when the economic profit is less than the bookkeeping, and even tends to zero, the entrepreneur will still continue to operate, receiving accounting profit.

Historical development

Back in the 19th century, various types of profit were considered: accounting and economic, and then a fairly strong difference was already evident between them. It was then that Alfred Marshall developed the first indicator of economic profit. It was defined as the difference between the net profit and the cost of the owner's capital, and all this was called residual income. While calculations seem simple, in practice it turns out that it is necessary to find a whole array of information necessary for this.

The main emphasis of Alfred Marshall was that when determining the value formed by a company at a particular time, it is necessary to take into account not only the costs that are reflected in the accounting documentation, but also the opportunity costs associated with attracting capital.

For a long time the development of the Marshal was unclaimed, and the value of economic profit was not so great. However, in the 80s of the last century, with the onset of globalization and capital outflows , developing countries began to consider different types of profit: accounting and economic. They are used to demonstrate alternative performance indicators of the company in order to attract more and more new investors.

Economic profit

It was she who acted as one of such indicators through which new partners in business are attracted. It assumes that the additional value of invested capital will be created only when the amount of real income exceeds the alternative costs of using this capital. You can simplify the definition as follows: economic profit exists only if the received financial result in fact exceeds all alternative ways of using the considered capital.

How to use the technique?

While forming the profit of the enterprise is reflected only in the accounting documentation. Economic profit has not taken root in the domestic practice of calculations, and for this there are several reasons. First of all, we are talking about ignorance of how to use this concept in decision-making by management personnel. Everyone is used to analyzing accounting profit, therefore the enterprise's activity is considered only through the prism of this factor. And those companies that decided to use this method face the challenge of adapting economic profits to tax and accounting standards.

Calculation standards

At the moment, the formula uses profit formula, which corresponds to the international standards of accounting and reporting, as well as American standards. They are completely compatible with each other, they use the same accounting and reporting principles, and on certain issues in American standards, the methodology is more clearly defined.

The requirements of international standards are aimed at bringing the legislation of the current system of financial reporting and accounting standards into some kind of harmonious state. It is generally believed that it is useful to use it to characterize the results of entrepreneurial activity of enterprises in a more realistic form. However, the American method relies on a greater number of developments, therefore in American companies there is a tendency to regulate transactions fairly clearly with less flexibility of each organization separately.

At the moment, economic profit in the balance sheet is not reflected at all, and its calculations are of a scientific or closed nature. The development of its ubiquitous use is hampered by the standardized nature of financial reporting and a certain conservatism in accounting.

Elements of economic profit

When using the residual income indicator that was proposed by Marshall, the companies had problems with comparing the initial data: capital costs will take into account the profit received by the enterprise based on market value, while the net profit serves as an accounting term, calculated on the basis of the book value. Naturally, the development of the world economy and market relations caused the aggravation of disagreements between the market and the enterprise's accounting value, which made the use of the residual income indicator simply impossible.

Types of profit

There are accounting, economic and normal profits. Usually, the economic profit is the difference between the total revenue and costs: external and internal. At the same time, the internal costs include the normal profit, which represents a minimal fee for retaining entrepreneurial talent. Profit, which is calculated on the basis of accounting information, is the difference between income from different types of activity and external costs. The real profit is the income that remains on the entrepreneur's accounts.

At the moment, accounting involves the use of five types of profit: gross, profits from sales, profits before taxation, profits from ordinary activities, net profit. Gross is the difference between the proceeds from the sale of goods, works, products, services and the cost of goods, works, services, products sold. Revenue, which is derived from the sale of goods, works, services and products, is usually called income from ordinary activities. The profit formula in this case is as follows:

П (вал) = ВР - С, where ВР - the gain received from realization; C - cost of sales.

Features of each type of profit

The profit from sales is the gross profit minus commercial and administrative expenses.

Profit before tax represents profit from sales , taking into account other costs and revenues, which may be operational and non-operating. Operational incomes include receipts, which are related to the provision of assets of the organization for a fee for temporary use. Non-sale incomes are penalties, fines, penalties for violation of contractual terms, assets that are received free of charge, profits of previous years, revealed in the reporting period.

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

Net income represents the profit from ordinary activities, which incur extraordinary incomes and expenses. Extraordinary income means proceeds that arise as a result of extraordinary circumstances of economic activity. Extraordinary expenses are understood as expenses related to similar situations.

"Dash" on the costs

If accounting, economic and normal profits are considered, it is worth noting that in general, profit is defined as the difference between total revenue and total costs. This is the simplest and most common calculation option that can be used at all.

Now you need to pay attention to the costs. Accounting and economic profit assumes different approaches to their definition. The costs themselves can be external and internal. The former include payments to external suppliers. When subtracting them from the total revenue, you can get accounting profit. But it will not take into account the internal costs to which it is customary to refer:

• Costs associated with resources owned by the enterprise itself;
• Normal profit, which depends on the most important resource - entrepreneurial ability.

Economic profit is obtained after the internal costs have been removed from the accounting.

The most obvious differences

It turns out that accounting profit is intended only for accounting for external costs, and economic is determined by subtracting also internal costs. In sum, external and internal costs form economic, they are also called alternative. This means that in order to determine the volume of real profits, it is necessary to proceed from a resource price that would have been received by the owner at its best use. The formation of the profit of the enterprise in this case occurs regardless of how it is calculated. But it is important to understand that the optimal option would be an increase in economic profit.