Finance Formulas / July 19, 2018 / Aniyah Booth
Accounting profit is the difference between total monetary revenue and total monetary costs, and is computed by using generally accepted accounting principles (GAAP). Put another way, accounting profit is the same as bookkeeping costs and consists of credits and debits on a firm’s balance sheet. These consist of the explicit costs a firm has to maintain production (for example, wages, rent, and material costs). The monetary revenue is what a firm receives after selling its product in the market.
Accounts receivable, inventory, prepaid assets and certain investments are not included in the cash ratio. These items may require time and effort to find a buyer in the market. In addition, the amount of money received from the sale of any of these items may be indeterminable. The cash ratio restricts the asset portion of the equation to only the most liquid of assets, such as cash, cash equivalents and marginable securities.
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