The management of any enterprise seeks profit. However, it can be calculated in different ways. In a research environment, a wide range of approaches to determining and interpreting the profit of a commercial firm can be observed. Among the most common are accounting and economic. The border between them in some cases is difficult to find - if we talk about the practical use of these methods. But at the level of conceptual understanding, accounting and economic approaches to understanding profits can be characterized by a tangible difference. What is it expressed in?
Definition of accounting profit
What is accounting profit? Through this term, it is customary to denote the financial result of the sale of certain products or services. Accounting profit is determined on the basis of the provisions of the legislation in the field of accounting and is recorded in reporting documents. As a rule, such sources should be provided to regulatory authorities - first of all, to the Federal Tax Service. Among the key documents in question is the profit and loss statement. It fixes the difference between the income of the company, which is defined as an increase in total assets, and expenses, which indicate a decrease in the company's capitalization.
The ratio of accounting and tax profit
Profit in accounting is adjacent to an indicator that correlates with taxes. The fact is that the payment of the corresponding fees to the treasury is not always carried out by the company synchronously with the dynamics of the change in the value of the base for calculating payments. This is mainly due to the application by the company of various deductions, as well as the peculiarities of the legislative criteria for their application. A company that has the right to use the corresponding privilege may not actually use it, as a result of which the net tax profit will be greater than the accounting one - which is recorded in the accounting documents. But in the next reporting period, accounting and tax profits, if there are no changes in the structure of revenue and costs, can already be leveled - as the company will take advantage of the deductions.
Modern economists record several basic varieties of accounting profit. We will study them in more detail.
Types of accounting profit
Accounting profit is of 5 main types:
- gross
- arising as a result of sales;
- profit before tax;
- profit from ordinary activities;
- net profit.
Regarding the gross indicator - it is defined as the difference between the amount of sales revenue - net of VAT and other statutory payments to the budget, and the cost of the corresponding goods, works or services. The profit from sales is determined on the basis of the difference between the revenue for specific commodity items and the costs associated with bringing the goods to the market. Profit before tax is defined as the difference between revenue and total expenses - all that may be provided for by the company's business model. Profit from ordinary activities is determined by subtracting from the previous figures of tax payments and expenses for the main activities of the company. Net profit is also determined after the deduction of costs and fees to the budget, calculated in relation to other activities.
The essence of economic profit
Having studied what accounting profit is, and in what varieties it can be provided, we study another term common among researchers. What is its essence? Economic profit - an indicator that characterizes, first of all, an increase in indicators of the value of the company. It can be defined as the difference between the figure reflected by the profitability of capital and the result of the product of the weighted average of assets to the value of investments.
Differences between economic and accounting profits
What is the fundamental difference between economic and accounting profit? The first term involves the consideration in the "formula" of the calculation of not only actual figures, but also those that reflect the ratio of potential assets of the company, as well as its obligations. Economic and accounting profits are pretty close concepts. However, the first term characterizes the enterprise rather in a strategic context, while the second - in a tactical one. The task of the accountant is to check whether these or other production indicators are correctly calculated, whether the reporting is correct, whether everything is in order with taxes. The economist’s task is to identify how stable the enterprise is in the aspect of the business model, what growth prospects it has, and which areas of production require urgent modernization.
Economic profit and opportunity costs
One of the most important criteria for calculating economic profit is the calculation opportunity cost. What are they? Opportunity costs - this is a shortfall in profit due to the refusal to choose a certain direction of investment. For example, if a company decides to start the production of washing machines, abandoning the production of televisions, then in the event of a sharp reduction in the price of offers from cable and satellite operators and an increase in the population’s demand for televisions, it will not receive significant revenue. As well as vice versa.
From the point of view of accounting, the structure of products manufactured by the company may not be taken into account. It doesn’t matter to a specialist in accounting - at least as far as his job responsibilities are concerned, what is the potential demand, what are the technological trends in a particular market segment. The main thing for him is to calculate the correct tax on accounting profits, to track its timely payment, to fix the corresponding figures in the statements.
The economist, in turn, determining profit, can pay close attention to opportunity costs. Analyzing these or other figures, he may come to the conclusion that it might be useful for the management of the company to reconsider investment activity in favor of starting production of new types of products.
Profit factors and their analysis
There are a number of key factors that determine a company's profitability. They can be divided into internal and external.
The first include:
- company management quality;
- level of competence of company managers;
- competitiveness of manufactured goods or services that are provided by the company;
- level of organization of production, technological adaptability of infrastructure;
- performance of equipment used;
- labor productivity of enterprise employees.
External factors determining profitability:
- political situation;
- priorities in the legislative regulation of economic processes;
- supply and demand in the market segment in which the company operates.
Accounting profit is fixed on the basis of actual indicators out of correlation with any of the noted factors. In turn, economic indicators - first of all, opportunity costs, may well be determined on the basis of an analysis of relevant factors.
Significance of Economic and Accounting Profit
For what purpose can economic and accounting profits be calculated? The determination of the first indicator is mainly necessary for the enterprise itself. The owner of any business, first of all, builds a business model, improves it, analyzes it for himself.In turn, the calculation of accounting profits is a necessity, which is largely explained by the need to submit to government bodies - primarily, the Federal Tax Service of various types of reports.
Of course, the company can also pay great attention to this aspect. For example, if there is a need to determine the cause of the discrepancy in the planned and actual performance of the company. Economic profit is considered by many experts as one of the key criteria for assessing the effectiveness of investing in a business. However, it is very important to determine the correct approach to its calculation. So, the main reporting document, in which accounting profit is recorded - on profit and loss, has a specific structure, which is set at the level of the legislation of the Russian Federation.
Sources in which economic profit is reflected are not defined in regulatory legal acts. Each enterprise develops appropriate forms independently. Of course, in certain industries there may be generally accepted standards for the preparation of documents in which economic profit is recorded. But this does not mean that such unified forms will be best suited for the business model of a particular organization. It may well be a situation in which the criteria for determining economic profit, the basis for its calculation, the company will have to develop completely on their own.
What is more important - economic or accounting profit
Among Russian economists, there are different points of view about what type of profit is more important - economic or accounting. Some experts believe that due to the lack of criteria for calculating the first indicator, the second should be the key. The specific figures defined in documents such as the balance sheet, profit and loss statement of the company can give the company management all the necessary information regarding the state of affairs in the business, experts say. There are a large number of approaches to the interpretation of these indicators, and if they are used correctly, the management of the company may not need to use any other methods of analyzing the business model.
There is another point of view. In accordance with it, the profit in the balance sheet can very superficially reflect the real state of affairs at the enterprise. The indicators that are included in the income statement may simply not affect the most important business processes. In this case, one cannot do without using economic methods for researching commercial activities.
Economic profit as a criterion of enterprise sustainability
Another argument put forward by experts - accounting profit makes it difficult to determine what the nature of the sources of revenue. The accountant fixes the income in its pure form and does not analyze, in the general case, then, due to what decisions, resources they appeared, what factors predetermined their specific value. Consider a simple example.
2 factories operate, produce the same products - for example, building materials. Their revenue, as well as profitability, are generally the same. The main documents - the balance sheet, profit and loss speaking report, have a very similar structure at both enterprises, the indicators recorded in it are comparable when comparing firms. If you look at any account used by this or that enterprise, the profit of all types is fixed practically in the same values. However, the main customers of the first plant are large holdings, the second mainly sells building materials to small and medium enterprises. Due to the complication of the political situation, the activities of large holdings that purchase the bulk of the products at the first plant become impossible in Russia. Contracts are terminated and these customers leave the market.The plant for the production of building materials begins to experience very difficult times. The second company, meanwhile - is developing excellently. Demand for its products is steadily growing - in connection with the opening of new industries in the Russian Federation and the needs of companies in high-quality building materials.
We see completely different results of commercial activities of two entities working in the same segment and with comparable accounting indicators. However, a similar state of affairs could be calculated to a certain extent if economic analysis were involved and the corresponding kind of profit. As we noted above, the accountant keeps track of the figures, the economist calculates the development strategy of the company, taking into account opportunity costs. It is quite possible to refer to them the shortage of profit by the first plant of building materials upon the fact of cooperation with small and medium enterprises - as the second company does.
Of course, even a successful business enterprise is required to take accounting profit. At least in connection with the need to provide relevant information to the tax service. The second plant will also maintain income tax accounting. However, the work of economists at this enterprise will also be carried out actively, since the study of opportunity costs for them is the most important factor in ensuring the competitiveness of the company and the sustainability of the business.
So, accounting profit - this is the actual figures to determine profitability level firms, and in many ways - the effectiveness of its current business model. Economic profit is not only actual, but also calculated indicators that allow to characterize the stability of the business model. These include opportunity costs. Despite the fact that among economists there may be dissimilarity of points of view regarding the priority of engaging in one or another approach, it is recommended that both concepts be used at the same time if possible.
