Book profit is a company’s total profit calculated from internal financial information, while accounting profit is represented on the income statement. Internal and external stakeholders use this information to determine the company’s financial performance and potential for growth.
Book profit is the total profit of a company calculated from internal financial information. This figure is calculated by taking a company’s gross sales or revenue, minus cost of goods sold and expenses used to generate net profit. Expenses may include sales and administrative expenses, depreciation, interest, or taxes. The specific types of expenses may also depend on the company’s operating environment and business operations. Accounting profit is usually represented on the company’s income statement. Income statements can be prepared for specific accounting periods, such as a monthly or annual period.
Monthly net income statements only reflect the information related to the current time period to generate earnings. Accountants can post entries in the accrual or deferral journal to add or remove amounts that should not be included in the current month’s income statement. This principle is part of the accrual-based accounting method to determine accounting profit. The annual net income statements consist of the aggregate total of each monthly net income statement. This annual net income statement indicates the total annual profit that the company has earned from business operations. This information is used by internal and external business stakeholders.
Internal users of company financial statements often include business owners and managers. These people review accounting earnings for monthly and yearly periods to determine how well the company is making a profit compared to the amount of money spent on expenses and cost of goods sold. Internal users can break down the income statement using financial ratios; These ratios provide internal users with a benchmark for comparison with industry standards or a competitor’s financial statement. This information also gives business owners and managers a deeper understanding of how well their company is generating profits.
External business stakeholders may be concerned about the company’s book profits for a variety of reasons. Banks or lenders often use net income statements to ensure that the company is generating enough profit to pay off bank loans used to finance business operations. Shareholders of publicly traded companies can review the statement of net income to see how well the company is generating profits compared to prior accounting periods. Book earnings listed on the statement of net income directly affect the amount of a company’s earnings per share. Increases in the company’s earnings per share generally indicate a gain for shareholders. Companies that pay dividends to shareholders can do so from the accounting profit earned during each accounting period. Shareholders are concerned about this information as it represents a passive income stream where they earn money from the performance of the company.
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