Accounting profit refers to the total revenue of a business minus its explicit costs which are associated with running the business. These costs include operating expenses, cost of goods sold, taxes, and interest payments. It is the profit figure that appears in a company’s income statement and it is calculated based on generally accepted accounting principles (GAAP).
Think of accounting profit as the money a business makes after paying all the bills and expenses that are necessary to keep the business running. It is calculated when you subtract all the costs such as salaries, rent, and materials from the total amount of money made from selling goods or services. It is very similar to calculating how much money is left after paying all the monthly expenses.
Accounting profit is a key measure in business economics for undertaking financial analysis. It is used by business owners, investors, and analysts to evaluate the financial performance, profitability, and efficiency of a business entity. It also plays a crucial role for tax purposes as it forms the basis for calculating income tax which the business has to pay.
For example, if a company earns Rs. 10 lakhs in sales and has expenses of Rs. 6 lakhs, its accounting profit would be Rs. 4 lakhs.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy