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What is Accounting Profit?

Profit is a term that is synonymous with earnings and net income, and it is basically what is left of revenues after expenses. All of these are basically computed the same way: gross revenue minus the cost of goods sold, business expenses, and taxes.

Some variations on each of these will choose to look at the numbers before certain expenses, such as taxes. For example, “gross” accounting profit could be defined as revenue minus cost of goods sold, while “operating” profits would also subtract the costs of business expenses and operations, and “net” profits would also subtract taxes.

There is also a distinction between accounting profit and economic profit. Economic profit uses the same equation but also subtracts opportunity costs. Opportunity cost could be easy or difficult to define, but it represents the benefits and cash flows that could have resulted from allocating the resources used in a different way.

Opportunity costs can only be estimated and theoretical, which is unlike the real and documented cash flows used in calculating accounting profit.

Keywords: profit, income, earnings, opportunity cost, net income, economic profit, gross revenue, operating profits, net profits,